FIREPOND, INC. - 10KSB - 20050420 - RESULTS_OF_OPERATIONS
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
$15,309,514 from inception through December 31, 2002. These expenses include
$3,320,137 in research and development expenses and $11,608,110 in general and
administrative expenses. As a result of the Bankruptcy Proceedings and a
cessation of all operations except the prosecution of the Bankruptcy Proceedings
and the LGS Adversary Proceeding, the general and administrative expenses of the
Company were substantially reduced.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001. For
the year ended December 31, 2002, the Company sustained net losses of $2,321,512
as compared to net losses of $4,653,268 for the year ended December 31, 2001.
The decrease in net operating losses primarily was due to a decrease in general
and administrative expenses.
The Company's operating expenses for the year ended December 31, 2002,
decreased by approximately 37% to $2,027,070, as compared to operating expenses
of $3,223,376 for the same period last year. The decrease in operating expenses
in 2002 was due to a decrease in general and administrative expenses. General
and administrative expenses decreased by $1,155,866 or approximately 37% to
$1,980,930 for the 2002 year, as compared to general and administrative expenses
of $3,136,796 for the same period the prior year. The decrease in general and
administrative expenses primarily was due to a reduction in stock based
compensation to employees and consultants, and a reduction of expenses incurred
with management consultants.
17
The Company's net non-operating expense (including non-operating interest
income and interest expense) decreased to $279,522 for the year ended December
31, 2002, as compared to non-operating expenses of $1,448,398 for the year ended
December 31, 2001. The decrease was primarily due to a decrease of approximately
82% in interest expense and a decrease of approximately 80% in debt conversion
costs for the year ended December 31, 2002. Interest expense for the year ended
December 31, 2002 was $148,370 compared to $806,657 for the prior year. For the
year ended December 31, 2002, debt conversion costs equaled $128,856 compared to
$631,512 for the prior year due to the decrease in the number of notes converted
to the Company's common stock during 2002 as compared to 2001.
Year Ended December 31, 2001 Compared To Year Ended December 31, 2000. For
the year ended December 31, 2001, the Company sustained net losses of
$4,653,268, as compared to net losses of $2,512,686 for the year ended December
31, 2000. The increase in loss primarily was due to an increase in interest
expense, debt conversion costs, and general and administrative expenses.
The Company's operating expenses for the year ended December 31, 2001,
increased by approximately 77% to $3,223,376, as compared to operating expenses
of $1,824,011 for the same period last year. The increase in operating expenses
in 2001 was due to increases in general and administrative expenses. General and
administrative expenses increased by $1,432,075 or approximately 84% to
$3,136,796 for the 2001 fiscal year, as compared to general and administrative
expenses of $1,704,721 for the 2000 fiscal year. The increase in general and
administrative expenses primarily was due to increases of $585,772 in stock
based compensation to employees and consultants, and an increase of $683,674 in
expenses incurred with management consultants.
The Company's net non-operating expense (including non-operating interest
income and interest expense) increased to $1,448,398 for the year ended December
31, 2001, as compared to non-operating expenses of $688,675 for the year ended
December 31, 2000. The increase was primarily due to an increase of
approximately 288% in interest expense and an increase of approximately 117% in
debt conversion costs for the year ended December 31, 2001. The increase in
interest expense was primarily due to the increase in value assigned to the
extension of the warrant exercise period related to the Company's debt
offerings. The effect of the valuation assigned to the warrants resulted in a
decrease in interest expense of $95,901 and an increase in interest expense of
$474,175 for the years ended December 31, 2000 and 2001 respectively. Debt
conversion costs for the year ended December 31, 2001, increased to $631,512 due
to the increase in the number of notes converted to the Company's common stock
during 2001 as compared to 2000.
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
18
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 December 31, 2002, the Company had $201,485 in current liabilities, of
which $154,400 was related to short term notes payable. The remaining portion of
the Company's current liabilities is primarily comprised of accrued expenses of
$44,055 (at December 31, 2002). The Company relied upon investments in debt and
equity securities to meet its obligations in the fiscal year ended December 31,
2002.
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 December 31, 2002, the Company's
cash position has declined. At December 31, 2002, the Company had available cash
of $4,688, as compared to available cash of $21,457 at December 31, 2001.
ITEM 7 - FINANCIAL STATEMENTS
The financial statements listed in the accompanying index to financial
statements required to be filed are attached to this Annual Report. Reference is
made to page F-1 of this Annual Report.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. As of March 15, 2005, we
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures (as defined in the Securities Exchange Act of 1934 Rules
13a-15(e) and 15d-15(e)). That evaluation was performed under the supervision
19
and with the participation of its management, including its Chief Executive
Officer and its Chief Financial Officer. Based on that evaluation, our Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting him to material information relating
to the Company required to be included in its periodic SEC filings.
Changes in Internal Control over Financial Reporting. The Company has made
no significant change in its internal control over financial reporting as of
March 15, 2005 that has materially affected, or is reasonably likely to
materially affect, its internal control over financial reporting.
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
As of December 31, 2002, the Company's executive officers and directors
and their ages were as follows:
-------------------------------------------------------------------------------
Name Age Position
-------------------------------------------------------------------------------
Michael T. Mozer 54 Chief Executive Officer, President and
Chairman
-------------------------------------------------------------------------------
Thomas F. Carroll 57 Vice President of Sales and Marketing
-------------------------------------------------------------------------------
James B. Babo 35 Vice President of Business Development
and Operations
-------------------------------------------------------------------------------
Michael Eckerman 50 Vice President of Manufacturer
Marketing
-------------------------------------------------------------------------------
Ronald F. Anderegg 50 Director
-------------------------------------------------------------------------------
Frank J. Pirri 62 Director
-------------------------------------------------------------------------------
John Watkins 52 Director
-------------------------------------------------------------------------------
Ray Solomon 50 Director
-------------------------------------------------------------------------------
Donald P. Uhl 69 Director
-------------------------------------------------------------------------------
George E. Sattler 66 Director
-------------------------------------------------------------------------------
Derrick Bushman 37 Director
-------------------------------------------------------------------------------
The following discussion includes biographical information regarding the
Company's officer, directors and significant employees. All officers are
appointed by and serve at the discretion of the board of directors of the
Company. Directors serve for one-year terms or until their successor is duly
elected and qualified. There are no family relationships between any director,
executive officer or person nominated or chosen by the Company to become a
director or executive officer.
MICHAEL T. MOZER, Chief Executive Officer, President and Chairman, has
been President and Chairman of the Board since January of 2002 and has been a
director of the Company since March 2000. In December 1999, he co-founded Morris
& Mozer Financial, Inc. ("MMF"), where he was a principal and served as
20
President until December 2001. MMF provides financial consulting, structuring
and debt placement services for businesses throughout the United States. From
1996 to 1999, he served as a Senior Vice President of Dougherty Summit
Securities, Inc., where he established structured finance and fixed income
divisions to serve the needs of financial institutions and businesses throughout
the United States. From 1983 to 1996, Mr. Mozer was engaged in the private
practice of law. From 1979 to 1983 he served as General Counsel for Norwest
Mortgage, Inc.
THOMAS F. CARROLL, Director, Vice President Sales and Marketing, joined
the Company as Vice President in August of 2000 and became a director on
February 23, 2001. Mr. Carroll has 32 years experience in the retail food
industry, working with both packaged goods manufacturers and food retailers
nationally. Before joining the Company, Mr. Carroll was the founder and
president of I.D.Y. Ltd., which was a company organized by Mr. Carroll in 1996
to create marketing programs for supermarket retailers nationally. I.D.Y. also
planned and executed marketing programs for small to mid-size consumer packaged
goods companies. Before his involvement with I.D.Y., from 1988 to 1996 Mr.
Carroll was Vice President, Marketing and Technology for Five Star Brokerage
Company, the leading food brokerage company in Colorado. Mr. Carroll previously
was a sales representative for Oscar Mayer and Company and a sales
representative for Gillette. He also served as director of National Accounts for
Ragu.
JAMES B. BABO, Vice President / Director of Product Development and
Operations, joined the Company in September 2001. Prior to joining the Company,
Mr. Babo worked for TKI Consulting, a division of Hall Kinion Company as a
Senior Consultant. Mr. Babo worked with Fortune 100 Companies as well as
start-ups, with a focus on managing I.T. and eCommerce projects. From 1991 to
1998, Mr. Babo worked for Dayton Hudson Corporation (Target Corporation), a
general merchandise retailer with annual gross sales in excess of $30 Billion.
Jim Babo worked as a Financial Analyst in operations and at corporate
headquarters. Jim Babo brings to the Company superior analytical, organizational
and management skills.
MICHAEL ECKERMAN, Vice President of Manufacturer Marketing, joined the
Company in January 2002 to handle all marketing to manufacturers. Mr. Eckerman
has more than 30 years experience in all facets of the retail food industry,
where he gained valuable expertise interacting with brand managers and senior
marketing managers of the vast majority of the major consumer packaged goods
(CPG) manufacturers. Mr. Eckerman began his career as territory manager for the
Campbell Soup Company and gained professional marketing and management
experience with the Nash Finch Company, a major wholesale distributor to
supermarkets. Thereafter, Mr. Eckerman was the key executive with several food
brokerage companies. Mr. Eckerman was President and General Manager of Remco
Ltd. in 1991. Mr. Eckerman was President and General Manager of Acosta Sales and
Marketing, Inc., in the Upper Midwest United States from 1985 to 2000. In
December of 2000, Mr. Eckerman was hired as a service representative for
Principal Financial.
21
RONALD F. ANDEREGG, Director, was elected to fill a vacancy on the
Company's board of directors on April 25, 2000. Mr. Anderegg currently is the
President and CEO of Parcus Networks, Inc., a provider of telecommunications
services. Before his involvement with Parcus Networks, Inc., from 1995 to 2000.
Mr. Anderegg was the President/CEO of SouthNet Telecom Services, Inc.
(STSI.net). STSI.net is a wholesaler of network services, including Voice
Internet Protocol Telephony (VoIP), Data Transport Services, Internet access,
e-commerce web development, website hosting and co-location services. The
company provides dial-up VoIP and Internet access to over 1,800 cities, reaching
65% of the U.S. population with the largest VoIP network in the nation, and is
among the top 50 certified Competitive Local Exchange Carriers (CLEC) in the
U.S. Mr. Anderegg is also a director of UltraBrowser.com. In addition, Mr.
Anderegg served as Division Vice President for TruGreen ChemLawn from 1979 to
1998.
FRANK J. PIRRI, Director, has been a director of the Company since 1995.
He has over 37 years of experience in the management of consumer and
business-to-business motivational programs. Since April 2001 he has been
self-employed. From the end of March of 2001 to December 1998 he served as a
Senior Vice President, Offline Commerce for MyPoints.com, Inc. From May 1997 to
November 1998, Mr. Pirri served as Executive Vice President of Motivation.Net,
an Internet Loyalty Marketing company. From January 1994 to May 1997, Mr. Pirri
served as the President and Chief Executive Officer of Life Facts, Inc., a
medical information products company. From January 1993 to January 1994, Mr.
Pirri served as the Vice Chairman of S&H Citadel, Inc., an incentive marketing
services company, following its merger with S&H Motivation and Citadel
Motivation. From 1987 to January 1993, Mr. Pirri served as President and Chief
Executive Officer of S&H Motivation, a consumer and business-to-business
performance improvement company. Before joining S&H Motivation, Mr. Pirri held
numerous positions over a 24-year period at The Sperry & Hutchinson Company (S&H
Green Stamps).
JOHN WATKINS, Director, has more than 17 years of experience in the food
industry. He currently serves as the Executive Vice President of New Business
Development for Acosta Sales and Marketing. Before becoming Executive Vice
President of New Business Development, Mr. Watkins held various positions at
Acosta Sales and Marketing beginning in 1983 before joining Acosta Sales and
Marketing, from 1977 to 1983, Mr. Watkins held several positions at Procter &
Gamble.
RAYMOND SOLOMON, Director since October 2000, is a licensed attorney, Mr.
Solomon has been engaged in solo practice specializing in the areas of medical
malpractice and children's lead poisoning cases since 1978. Mr. Solomon is also
a shareholder of the Company.
DONALD P. UHL, former President and Chairman, is a co-founder of the
Company. Since the inception of the Predecessor in December 1992 until March
2000, Mr. Uhl served as the Executive Vice President and a director of the
Company or the Predecessor. Mr. Uhl was elected President and Chairman by the
board of directors of the Company on March 8, 2000. Before joining the Company,
Mr. Uhl served as an officer, director or consultant to companies in the
electronic testing equipment, computer disc and coupon businesses. From February
1992 to October 1992 Mr. Uhl served as Executive Vice President of Es-Tech
22
Corporation, where he was responsible for facilitating the marketing and
production of the aluminum can recycling CanPactor(TM). Before working on the
CanPactor project, Mr. Uhl served as Vice President of Corporate Development for
Premier Technologies Inc., a startup company engaged in the production of
electronic cable-test equipment. From 1988 to 1990, Mr. Uhl was the President of
Capital Funding Advisors Inc., a consulting firm specializing in developing
financing proposals for small emerging companies. Before that time, Mr. Uhl was
founder, Chairman and President of Western Energy Development Company Inc., a
publicly held company involved in oil and gas production. Mr. Uhl also served on
the Governors Front Range policy committee from 1980 to 1981, was the Mayor of
Monument, Colorado from 1978 to 1982 and was the Chairman of the Pike's Peak
Area Council of Governments from 1980 to 1982.
GEORGE E. SATTLER, Director, was elected to the board of directors of the
Company in October 2000. Mr. Sattler has 47 years experience in the retail food
industry with supermarkets and with major packaged goods manufacturers. From
1996 to 2000, Mr. Sattler was the president of G.E.S. Associates, which provides
consulting services to food brokers and retailers across the United States. In
1974, he co-founded the Mancini Groesbeck Brokerage Company, the first regional
food brokerage in the west. In 1987, Mr. Sattler bought out his partner and
merged with another local food broker to form Five Star Brokerage of Colorado.
Five Star operated in northern California, Oregon, Washington, Montana, Idaho,
Utah, and Colorado. In 1995, Five Star was acquired by Marketing Specialists, a
national sales and marketing company. Mr. Sattler remained chairman of the
Colorado operation, which served such clients as: Nabisco, H.J. Heinz, Borden
Foods, Ragu Corp., Jergens, Kelloggs, Mars, Dial, Quaker Oats Company, and many
others. Since leaving Marketing Specialists, George Sattler has devoted full
time to operating his master broker/consulting business, G.E.S. Associates,
bringing manufacturers together with brokers throughout the U.S.
DERRICK BUSHMAN, Director, has been a director of the Company since
February 2001. Mr. Bushman has over 20 years of experience in the financial
services industry. He currently is the President of Canton State Bank and holds
several management/ownership positions in several financial firms throughout the
upper Midwest. Mr. Bushman was a founding partner and the Chief Financial
Officer of Dealers Credit, which was organized in 1992 and later sold to BB&T in
1999. As the firm's CFO, he structured financing arrangements to address its
capital needs using both debt and equity methods of financing. He also was
responsible for the management of all financial functions for the firm in the
areas of lending and collections. Additionally, Mr. Bushman is involved in
several family-owned businesses in the produce and manufacturing industries. He
graduated from the University of Notre Dame in 1987 with a degree in Business
Administration.
Subsequent Changes in Management. Following the end of the fiscal year,
the Company received the resignations of Messrs. Bushman, Pirri, Watkins,
Solomon, Sattler and Mozer on various dates from January 2003 until July 13,
2003. On July 14, 2003, the sole remaining directors of the Company were Donald
P. Uhl and Ronald F. Anderegg. On that date, the Board of Directors formally
23
terminated and removed all officers of the Company and appointed Erich
Spangenberg as the Chairman, CEO, Treasurer and Secretary, and Donald P. Uhl as
President. Mr. Spangenberg is a principal of AFGVII (see Item 12. "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS"). Mr. Spangenberg and Douglas B. Croxall
were appointed to fill two vacant positions on the Board of Directors.
Compensation Committee Interlocks and Insider Participation. From
approximately December 2000 to February 2002, Mr. Derrick Bushman, Director and
Mr. Michael T. Mozer, President, Chief Executive Officer and Chairman, were both
on the board of directors of ISC. Mr. Mozer resigned from the board of directors
of ISC in February 2002 and relinquished all interest in ISC.
As of December 31, 2002, no other interlocking relationship existed
between the Company's board of directors or Compensation Committee and the board
of directors or Compensation Committee of any other Company.
Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a)
Beneficial Ownership Reporting Compliance Section 16(a) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules of the
Commission thereunder require the Company's executive officers, directors and
greater than 10% stockholders to file reports of ownership and changes in
ownership of the Common Stock of the Company with the Commission. Based upon a
review of such reports, the Company has determined that during the fiscal year
ended December 31, 2002 one Form 4 was not timely filed by Michael T. Mozer and
one Form 5 was not filed by Robert Cohen.
ITEM 10 - EXECUTIVE COMPENSATION
Remuneration of Executive Officers
The following table sets forth information concerning the compensation
received for the fiscal years ended December 31, 2002, 2001 and 2000 for
services rendered to the Company in all capacities by the individual who served
as the Company's Chief Executive Officer at the end of the 2002 fiscal year and
other highly compensated executives of the Company. The total amount of the
annual salary and bonus payable to each of the Company's other executive
officers for the last completed fiscal year was below $100,000. See Item 12 -
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
24
------------------------------------------------------------------------------------------------------------------------
Long Term Compensation
----------------------
Annual Compensation (1) Awards Payouts
----------------------- ------ -------
Securities
Restricted Underlying All other
Names and Principal Salary Bonux Stock Options/SARs Compen
Position Year ($) ($) Other ($) Awards ($) (#) LTIP ($) sation(1)
-------------------------------------------------------------------------------------------------------------------------
Michael Mozer, CEO 2002 130,000 -0- -0- -0- 200,000 -0- -0-
2001 -0- -0- -0- -0- 25,000(2) -0- -0-
2000 -0- -0- -0- -0- -0- -0- -0-
-------------------------------------------------------------------------------------------------------------------------
Donald P. Uhl, former 2002 29,999 -0- -0- -0- -0- -0- -0-
CEO 2001 129,990 -0- -0- -0- 700,000 -0- -0-
2000 80,000 -0- -0- -0- -0- -0- -0-
-------------------------------------------------------------------------------------------------------------------------
Robert L. Cohen, CFO 2002 87,500 -0- -0- -0- -0- -0- -0-
2001 120,000 -0- -0- -0- -0- -0- -0-
2000 56,800 -0- -0- -0- 349,375- -0- -0-
-------------------------------------------------------------------------------------------------------------------------
James B. Babo, Vice 2002 78,000 -0- 0 -0- -0- -0- -0-
President Business Dev. 2001 54,250 -0- -0- -0- -0- -0- -0-
and Operations 2000 -0- -0- -0- -0- -0- -0- -0-
-------------------------------------------------------------------------------------------------------------------------
Michael Eckerman, Vice 2002 65,000 -0- -0- -0- -0- -0- -0-
President Manufacturer 2001 -0- -0- -0- -0- -0- -0- -0-
Mareketing 2000 -0- -0- -0- -0- -0- -0- -0-
-------------------------------------------------------------------------------------------------------------------------
Thomas F. Carroll, Vice 2002 43,333 -0- -0- -0- -0- -0- -0-
President Sales and 2001 150,000 -0- 13,827 -0- -0- -0- -0-
Marketing 2000 62,500 -0- 2,900 -0- 212,500 -0- -0-
-------------------------------------------------------------------------------------------------------------------------
(1) All other compensation in the form of perquisites and other personal
benefits has been omitted because the aggregate amount of such perquisites and
other personal benefits constituted the lesser of $50,000 or 10% of the total
annual salary and bonus of the named executive for such year.
(2) Does not include warrants to purchase 3,150,000 shares of Common Stock
granted to Morris & Mozer Financial Inc., of which Mr. Mozer is a principal,
granted in 2001.
Director Compensation
Directors of the Company who are also employees do not receive cash
compensation for their services as directors or members of committees of the
board of directors of the Company, but are reimbursed for their reasonable
expenses incurred in connections with attending meetings of the board of
directors or management committees of the Company.
In January 2001 the Company's board of directors approved the grant of
options to purchase 25,000 shares of the Company's restricted Common Stock to
each outside director, for each year of service provided to the Company at an
exercise price of $.25 per share. The Company granted options to purchase 25,000
shares of its Common Stock to Mr. Anderegg, Mr. Mozer, Mr. Sattler and Mr.
Solomon, options to purchase 125,000 shares of its Common Stock to Mr. Pirri and
options to purchase 175,000 shares of its Common Stock to Mr. Monsky. Upon
exercise, the cost of these shares will be paid by a note from each director for
their respective shares and be collateralized by the corresponding stock. This
resolution was ratified by the Company's shareholders at the 2001 Annual
Shareholders' Meeting. See ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.
25
Employment Agreements
The Company and Mr. Robert Cohen were parties to a one-year employment
agreement dated July 11, 2000, pursuant to which the Company retained Mr. Cohen
as its Chief Financial Officer and Vice President. The term of the agreement was
12 months and ended on July 10, 2001. Mr. Cohen continued to serve as Chief
Financial Officer until October 2002. The agreement provided for a salary of
$10,000 per month during its term. Under the employment agreement, the Company
granted to Mr. Cohen options to purchase 114,375 shares of the Company's Common
Stock under the employment agreement. Mr. Cohen's employment agreement also
contains certain other customary terms and provisions, including provisions
relating to the treatment of confidential information and the solicitation of
customers and accounts belonging to the Company. Mr. Cohen was also granted
options to purchase an additional 150,000 shares of Common Stock, 12,500 for
each month of employment, at an exercise price of $1.00 or 85% of the average
closing price during the 15 days prior to exercise, whichever is less. Such
options were exercisable for a period of two years from the date of grant and
expired unexercised in July 2002.
The Company and Mr. Thomas F. Carroll were parties to a one-year
employment agreement dated August 1, 2000, pursuant to which the Company
retained Mr. Carroll as its Vice President of Sales and Marketing. Mr. Carroll's
employment agreement provided for a gross salary for $12,500 per month during
its term. In addition to salary compensation, Mr. Carroll received options to
purchase 87,500 shares of the Company's Common Stock, which are immediately
exercisable at an exercise price of $0.25 per share and will expire two (2)
years from the date on which they were granted. Under the employment agreement,
Mr. Carroll also is eligible to receive additional options to purchase shares of
the Company's Common Stock, which options shall be exercisable at the date on
which they will have been granted. These options will be exercisable at an
exercise price equal to the lesser of $1.00 per share or 85% of the average
closing price of the stock during the 15 calendar days before the date on which
they will have been exercised. These options expired in August 2002. Mr. Carroll
continued to serve as Vice President until May 2003.
Individual Option Grants
During the fiscal years ended December 31, 2002, options and warrants to
purchase 200,000 shares of the Company's Common Stock, were granted to Michael
T. Mozer at an average exercise price of approximately $0.36 per share. These
options expired on November 15, 2002. Options to purchase 1,100,000 shares of
Common Stock were granted to two lenders at exercise prices ranging from $0.01
to $0.40 per share. The following tables set forth certain information at
December 31, 2002, and for the fiscal year then ended with respect to stock
options granted to and exercised by the individuals named in the Summary
Compensation Table above.
26
Option/SAR Awards
-------------------------------------------------------------------------------
Name Number of % of Total
Options/SARs
Securities Granted to
Underlying Employees Exercise or
Options/SARs in Fiscal Base Price Expiration
Names Granted Year (1) ($/share) date
-------------------------------------------------------------------------------
Michael T. Mozer 200,000 100% $0.36 November 15, 2002
-------------------------------------------------------------------------------
----------
(1) Based on options granted to certain directors, executive officers and
employees to purchase 200,000 shares of the Company's Common Stock, but not
including options granted to (i) noteholders of the Company to extend the
payment dates (1,898,631 shares), (ii) certain consultants to purchase 365,493
additional shares of Common Stock of the Company, and (iii) investors or lenders
to purchase 1,100,000 shares of Common Stock of the Company.
27
Option Exercises
--------------------------------------------------------------------------------
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at Fiscal at Fiscal
Year End Year End
Shares (1) (2)
Acquired on Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
--------------------------------------------------------------------------------
Michael T. Mozer -0- $0 -0-/-0- $-0-/-0-
--------------------------------------------------------------------------------
Donald P. Uhl -0- -0- 700,000/-0- -0-/-0-
--------------------------------------------------------------------------------
James B. Babo -0- -0- -0-/-0- -0-/-0-
--------------------------------------------------------------------------------
Michael Eckerman -0- -0- -0-/-0- -0-/-0-
--------------------------------------------------------------------------------
Robert L. Cohen -0- -0- 349,375/-0- -0-/-0-
--------------------------------------------------------------------------------
Thomas F. Carroll -0- -0- 212,500/0 -0-/-0-
--------------------------------------------------------------------------------
Other Directors -0- -0- 375,000/0 -0-/-0-
--------------------------------------------------------------------------------
----------
(1) Calculated on the basis of the fair market value of the underlying
securities at the exercise date minus the exercise price.
(2) Calculated on the basis of the fair market value of the underlying
securities at December 31, 2002 ($0.015 per share) minus the exercise price.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Except as otherwise indicated, the following table sets forth certain
information regarding the beneficial ownership of the Company's Common Stock at
December 31, 2002, by (i) each of the Company's directors and officers, (ii)
each person or entity who beneficially owned more than five percent of the
Company's Common Stock or Preferred Stock, and (iii) all directors and officers
of the Company as a group. Unless otherwise indicated, all addresses are care of
the Company at its executive offices.
28
Amount and
Nature of
Name and Address of Beneficial Percent of
Beneficial Owner Class of Secutiry Owner (1) Class
---------------- ----------------- --------- -----
Ronald F. Anderegg Common Stock 4,911,921(2) 6.28%
1600 South Beacon Boulevard
Grand Haven, MI 49417
Melissa Schulze Common Stock 4,700,000(3) 5.94%
6756 South Holland Way
Littleton, CO 80128
Michael T. Mozer Common 3,543,643(4) 4.54%
Stock
Donald P. Uhl Common 4,080,000(5) 5.17%
Stock
Derrick Bushman Common 3,059,680(6) 3.86%
Stock
Frank J. Pirri Common 650,000(7) *
Stock
Raymond Solomon Common 377,500(8) *
Stock
George E. Sattler Common 25,000(9) *
Stock
John Watkins Common -0- *
Stock
Robert L. Cohen Common 10,000 *
Stock
Thomas F. Carroll Common -0- *
Stock
Dale Davis Preferred 1 50.0%
Stock
CHKM LLC Preferred 1 50.0%
Stock
All Officer and Directors Common 16,669,101 20.78%
as a group (ten persons) Stock
----------
* Less than 1.0%
(1) Beneficial ownership is determined in accordance with the applicable rules
under the Exchange Act. In computing the number of shares beneficially owned by
an executive officer or a director and the percentage ownership of that person,
shares of the Company's Common Stock subject to options held by that person that
are currently exercisable, or become exercisable within 60 days from December
31, 2002, are deemed outstanding. However, such shares are not deemed
outstanding for purposes of computing the percentage ownership of any other
person. For purposes of determining the individual beneficial ownership
percentage, each percentage was calculated based on the Company's Common Stock
outstanding at December 31, 2002 (78,178,072 shares) adjusted in the case of
each executive officer and director by the of stock options held by that
individual and which are exercisable within 60 days of December 31, 2002.
(2) Includes 4,886,921 shares of the Company's Common Stock held in Mr.
Anderegg's name and options to purchase 25,000 shares of the Company's Common
Stock at an exercise price of $.25 per share.
(3) Includes options to purchase 1,000,000 shares of Common Stock at an exercise
price of $0.012 per share.
(4) Includes options to purchase 200,000 shares at an exercise price of
approximately $0.36 per share.
29
(5) Includes 1,000,000 shares of the Company's Common Stock held in Mr. Uhl's
name and options to purchase 700,000 shares of the Company's Common Stock at an
exercise price of $.30 per share. Includes 2,380,000 shares of the Company's
Common Stock are held in the name of the PLDLC Family Limited Partnership, a
Colorado limited partnership. Mr. Uhl is General Partner and exercises voting
control with respect to the stock in the partnership. Mr. Uhl disclaims
beneficial ownership of the PLDLC shares other than through his derivative
ownership interest in the PLDLC partnership.
(6) Includes 1,914,006 shares of the Company's Common Stock held in Mr.
Bushman's name and options to purchase 1,145,674 shares of the Company's Common
Stock at prices ranging from $.75 per share to $1.50 per share.
(7) Includes 525,000 shares of the Company's Common Stock held in Mr. Pirri's
name and options to purchase 125,000 shares of the Company's Common Stock at
$.25 per share.
(8) Includes 352,500 shares of the Company's Common Stock held in Mr. Solomon's
name and options to purchase 25,000 shares of the Company's Common Stock at $.25
per share.
(9) Includes options to purchase 25,000 shares of the Company's Common Stock at
an exercise price of $.25 per share.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Acquisition of E. 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. Prior to the acquisition, the
Schulze Corp. owned 20,144,196 shares of the Company's Common Stock. Under the
terms of an Agreement and Plan of Merger dated March 30, 2001, among 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. The effect of the merger was to remove from the
market over 20 million shares of the Company's Common Stock that may have been
free-trading shares and to acquire a patent and equipment that the Company
believes could be valuable to the Company's future operations.
30
The Company generated the cash necessary to pay the Cash Amount through
the sale to certain investors, 2,292,000 shares of its Common Stock at a price
per share of $.75. The purchasers of these shares of the Company's Common Stock
included Derrick Bushman, a director of the Company, and certain principals and
affiliates of Mr. Bushman.
Loans To and From Officers
In March 2000, the Company signed an agreement with MMF, whose former
principal officer and principal was Michael T. Mozer, the CEO, President and
Chairman of the Company. This agreement provides for the firm to assist the
Company in obtaining the necessary equipment financing and revolving credit
facility required to implement and rollout the Company's proprietary electronic
coupon clearing system in multiple retail locations. In association with this
agreement, the Company agreed to issue the firm warrants to purchase 3,150,000
shares of the Company's restricted Common Stock at an exercise price of $2.00
per share. These warrants may not be exercised for two years following the date
of issue and expire five years after the date of issue. Additionally, the
Company may call the warrants any time after two and one-half years from the
date of issue and before the expiration of the warrants at a price of $4.00 per
share. These warrants were issued effective January 19, 2001 in connection with
the $2,052,000 private equity funding arrangement completed in January 2001.
In September 2000, the Company borrowed $30,000 from Mr. Donald Uhl,
President and Chief Executive Officer of the Company. Management believes that
such funds were borrowed on terms no less favorable than would otherwise have
been available to the Company through unrelated third-party sources. This loan
was evidenced by a promissory bearing interest at an annual rate of 9.5%. In
February 2001, the Company paid all principal and interest payable under the
loan in the amount of $31,281.
In November 2000, the Company borrowed $180,000 from a partnership whose
general partner is Mr. Donald Uhl, President and Chief Executive Officer of the
Company. This loan was evidenced by a promissory note bearing interest at an
annual rate of 9.5%. Management believes that such funds were borrowed on terms
no less favorable than would otherwise have been available to the Company
through unrelated third-party sources. In February 2001, the Company paid all
remaining principal and interest due under the promissory note in the amount of
$183,631.
In November 2000, the Company borrowed $160,000 from the Bushman Group,
LLC. This loan was evidenced by a promissory note bearing interest at an annual
rate of 9.5%. Mr. Derrick Bushman, who became a director of the Company in March
2001, is a principal of the Bushman Group. Management believes that the terms of
the transaction were no less favorable than would otherwise have been available
to the Company through unrelated third-party sources. In February 2001, the
Company repaid all principal and interest due under the promissory note in the
amount of $163,623.
In December 2000, the Company borrowed $160,000 from Mr. Mitchell Bushman.
Mr. Mitchell Bushman is the brother of Mr. Derrick Bushman, a director of the
Company. This loan was evidenced by a promissory note bearing interest at an
annual rate of 9.5%. Management believes that the terms of the transaction were
no less favorable than would otherwise have been available to the Company
through unrelated third-party sources. In February 2001, the Company repaid all
principal and interest due under the promissory note in the amount of $162,332.
31
On May 15, 2001, the Company borrowed $125,493 from a Derrick Bushman, a
director of the Company, bearing interest at 8% per annum, convertible into
310,155 shares of the Company's Common Stock. Due to the beneficial conversion
privilege, $125,493 was recorded as debt issuance costs. On June 7, 2001, the
shareholder/director elected to convert the note and $565 of accrued interest
into 310,155 shares of the Company's Common Stock.
In October 2002, the Company borrowed $100,000 from Melissa McBride
(Schulze), a shareholder of the Company. The Note bears interest at 18% with an
option to convert the interest to1,000,000 shares of Common Stock. The Company
also borrowed $39,647 from directors and former directors. The Company believes
that such loans were made on terms no less favorable to the Company than those
available from third parties in an arm's-length transaction.
Sale of Common Stock to Directors
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 an exercise price of $.25
per share (400,000 shares in the aggregate). The Company granted options to
purchase 25,000 shares of its Common Stock to Mr. Anderegg, Mr. Mozer, Mr.
Sattler and Mr. Solomon, options to purchase 125,000 shares of its Common Stock
to Mr. Pirri and options to purchase 175,000 shares of its Common Stock to Mr.
Monsky. These shares may be exercised by a full recourse note payable by each
director. This resolution was ratified by the Company's shareholders at the 2001
Annual Shareholders' Meeting held in October 2001. The Company recorded
compensation expense of $20,000 in connection with the grant of these options.
In May 2001, the Company sold 403,999 shares of Common Stock to Derrick
Bushman, Director, and three other purchasers who qualified as "accredited"
investors under Rule 501 of Regulation D under the Securities Act of 1933, as
amended ("Securities Act") for total gross proceeds of $303,000. These proceeds
were than used by the Company to reduce notes payable and accrued interest
payable to selected note holders of the Company outlined in Note 3 to the
Financial Statements included with this Annual Report.
In December 2001, the Company received stock subscriptions for $175,000 of
additional equity from each of Michael T. Mozer, President, CEO and Chairman and
Derrick Bushman, Director, enabling the Company to begin the marketing of its
Budget Saver(TM) program. Under the term of these agreements, each director will
receive 405,093 shares of the Company's Common Stock. Additionally, each
director shall receive a royalty equal to one quarter of one cent ($.0025) for
each coupon processed by the Company through the Budget Saver(TM) program. This
royalty payment shall continue until that time when the bid price for the
Company's Common Stock equals or exceeds $2.00 per share for at least 72 days
within a 90 day period; provided, that the royalty shall remain in place until
at least November 30, 2002 regardless of the bid price. The directors also have
the first right of refusal on providing up to $2,250,000 of additional equity to
the Company.
32
In August 2002, the Company sold 2,000,000 shares of Common Stock to
Michael T. Mozer, Chairman and CEO, for $100,000. In connection with Mr. Mozer's
employment, the Company issued to Mr. Mozer options to purchase 200,000 shares
of Common Stock as at exercise price of approximately $0.36 per share.
Certain Business Relationships
ISC entered into an Agreement for the Purchase and Sale of Stock on
December 1, 2001. Derrick Bushman, Director of the Company, is also an executive
officer of ISC and is a beneficial owner of over 10% of ISC. Michael T. Mozer,
the Chief Executive Officer, President and Chairman of the Company, was an
executive officer of ISC until February 2002, when he resigned his position with
ISC and divested himself of any interest therein. As described elsewhere in this
Annual Report, in January 2001, the Company completed a private equity funding
agreement with ISC 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. Under the terms of the agreement, the Company received
initial proceeds of $1,000,000 and an additional $1,052,000 was 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 August 2001, the Company received the remaining $552,000 from escrow in
exchange for the issuance of 7,600,000 options to purchase shares of the
Company's restricted Common Stock at prices ranging from $.75 per share to $1.50
per share. These options were issued to the investor group since the Company did
not complete the milestones required for the release of the escrowed funds as
designated by the agreement. In addition to the equity proceeds, the Company
required supplementary financing to fund the equipment and accounts receivable
financing required for the launch by the Company of the initial pilot program of
its proprietary electronic coupon clearing system in four retail supermarkets in
South Carolina. Pursuant to the terms of the agreement, the Company is provided
with accounts receivable financing, and in connection with the satisfaction by
ISC of those conditions, in August 2001 the Company released from escrow
1,000,000 shares of the Company's restricted Common Stock. In January 2002, ISC
provided the Company with an additional $150,000 to purchase 347,222 shares of
the Company's Common Stock and a royalty equal to one half of one cent ($.005)
for each coupon processed by the Company through the Budget Saver(TM) program
until such time as ISC shall have received royalty payments totaling $300,000.
33
Other Matters
On December 31, 2001, Donald P. Uhl resigned as Chairman, President, and
Chief Executive Officer of the Company. Mr. Uhl was succeeded by Michael T.
Mozer, the Company's Vice Chairman, on January 1, 2002. In February 2002 and in
conjunction with the hiring of Mr. Mozer, 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 $.36 per share. These options were granted
pursuant to the Company's 2000 Omnibus Equity Incentive Plan.
In January 2002, the Company raised $150,000 of additional equity from ISC
enabling the Company to continue the marketing of its Budget Saver(TM) program.
Under the term of the agreement, ISC received 347,222 shares of the Company's
Common Stock. Additionally, ISC shall receive a royalty equal to one half of one
cent ($.005) for each coupon processed by the Company through the Budget
Saver(TM) program. This royalty payment shall continue until that time when ISC
shall have received royalty payments totaling $300,000. In January 2001, the
Company granted to Mr. Donald P. Uhl, Chief Executive Officer, options to
purchase 700,000 shares of the Company's Common Stock at an exercise price of
$.30 per share. The options are immediately exercisable and will expire in
January 2006.
In January 2001, the Company's board of directors approved the grant of
options to each of the Company's directors, based on their respective years of
service. The board approved a grant of options to purchase a total of 400,000
shares of the Company's Common Stock at an exercise price of $0.25 per share,
subject to the subsequent approval of the Company's shareholders. This grant was
approved by the shareholders at the annual meeting held in October 2001. All
such options expire two years after the date on which they will have been
granted.
The investment group that provided additional development capital to the
Company and that formed ISC, was introduced to the Company by Morris & Mozer
Financial, Inc., of which Michael T. Mozer, the CEO, President and Chairman was
formerly a principal. In addition to providing the Company with development
capital, ISC is expected to provide the Company with debt financing in
connection with its coupon distribution and clearing systems. In January 2001,
as compensation for its services, MMF received warrants to purchase 3,150,000
shares of the Company's Common Stock that can be exercised anytime in the third,
fourth or fifth year after the date on which they were issued. The exercise
price is $2.00 per share and the Company may call the warrants anytime after two
and one-half years at $4.00 per share. In addition, MMF would receive a one-time
fee equal to 1% of the amount of each "draw" made by the Company against either
the equipment financing or the receivables revolver.
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this Annual Report.
34
Exhibit
Number Description
------ -----------
2.1 Agreement and Plan of Merger dated March 30, 2001, by and among the
Company, In Store Acquisition Corp., E. Schulze Corporation and the
stockholders of The E. Schulze Corporation dated March 30, 2000 (1)
3.1 Articles of Incorporation (2)
3.1.2 Certificate of Amendment filed with the Nevada Secretary of State as of
October 7, 1998 (3)
3.1.3 Articles and Agreement of Merger filed with the Nevada Secretary of State
as of October 8, 1998 (3)
3.1.4 Certificate of Amendment filed with the Nevada Secretary of State as of
April 21, 2000 (3)
3.1.5 Certificate of Amendment filed with the Nevada Secretary of State as of
November 14, 2000 (3)
3.2 Bylaws of the Company (as amended) (2)
4.1 Specimen of Common Stock of the Company (2)
4.2 Warrant issued to Michael T. Mozer (3)
4.3 Warrant issued to Frederick L. Morris (3)
4.4 Stock Option Agreement dated August 20, 2001, among the Company, Michael
T. Mozer and Frederick L. Morris (3)
4.5 Form of Stock Option Agreement dated August 20, 2001 between the Company
and various investors listed on a schedule thereto (3)
4.6 Form of Stock Option Agreement between the Company and various investors
(3)
10.1 Memorandum of Understanding dated January 13, 1997, with Unisys
Corporation (2) (4)
10.1.2 Memorandum of Understanding dated February 25, 1997, with Unisys
Corporation (2) (4)
35
10.1.3 Memorandum of Understanding dated March 19, 1997, with Unisys Corporation
(2) (4)
10.1.4 Memorandum of Understanding dated April 4, 1997, with Unisys Corporation
(2) (4)
10.2 Patent and Software License Agreement dated November 29, 2001 between Lets
Go Shopping, Inc. and the Company (5)
10.3 Asset Purchase Agreement by and between the Company and Partnership for
Shared Marketing, Inc., and amendments thereto (2)
10.4 Form of Agreement for the Purchase and Sale of Stock to be dated as of
December 1, 2001 between the Company and Derrick Bushman (3)
10.5 Form of Agreement for the Purchase and Sale of Stock dated January 23,
2002, between the Company and In Store Capital, LLC (3)
10.6 Common Stock Purchase Agreement dated January 19, 2001, among the Company,
Derrick Bushman and various other investors listed on a schedule thereto
(3)
10.6.1 Escrow Agreement dated January 19, 2001, among the Company, Derrick
Bushman, as the Purchaser representative and City National Bank, as
Escrow Agent (3)
10.6.2 Agreement to Provide Financing dated January 19, 2001, between the
Company and ISC (3)
10.7 Form of Purchase Agreement between the Company and various investors (3)
10.8 Stock Option Agreement between the Company and Michael T. Mozer dated June
18, 2002. *
10.9 Purchase Agreement between the Company and Michael T. Mozer dated June 18,
2002. *
10.10 Promissory Note in favor of Melissa McBride (Schulze) dated October 21,
2002.*
10.11 Credit Agreement between the Company and Acclaim Financial Group Ventures
II, LLC dated July 15, 2003. *
10.12 Settlement Agreement and Release between the Company and Derrick Bushman
and related parties dated September 25, 2003. *
10.13 Settlement Agreement dated March 25, 2004 between the Company and Let's Go
Shopping, Inc., James McCreary and James B. Babo. *
10.14 Purchase Agreement between the Company and Michael T. Mozer dated August
29, 2002.
36
21.1 List of Subsidiaries *
31.1 Certification of Principal Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a) *
31.2 Certification of Principal Accounting Officer Pursuant to Rule
13a-14(a)/15d-14(a) *
32.1 Section 1350 Certification *
---------------------------
* Filed herewith.
(1) Previously filed with the Commission and incorporated by reference from the
Company's Current Report on Form 8-K filed April 16, 2001.
(2) Previously filed with the Commission and incorporated by reference from the
Company's Registration Statement on Form 10 filed December 15, 1999, as amended.
(3) Previously filed with the Commission as an exhibit to the Annual Report on
Form 10-K for the fiscal year ended December 31, 2001 filed on April 1, 2002.
(4) Portions omitted pursuant to a confidential treatment request filed
separately with the Commission.
(5) Previously filed with the Commission and incorporated by reference from the
Company's Current Report on Form 8-K filed January 1, 2002.
(b) REPORTS ON FORM 8-K.
Current Report on Form 8-K filed on November 25, 2002.
37
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The aggregate fees billed for professional services rendered by the
Company's principal accountant for the audit of its annual financial statements,
review of its financial statements included in its quarterly reports and other
fees that are normally provided by the Company's accountant in connection with
its audits during the fiscal years ended December 31, 2002 and 2001 were $24,785
and $32,465, respectively.
Audit Related Fees
The Company paid fees of $760 and $9,100 for assurance and related
services by the Company's principal accountant for the fiscal years ended
December 31, 2002 and 2001, respectively.
Tax Fees
The Company paid its principal accountant $1,400 and $1,000 for
professional services related to tax compliance, tax advice and tax planning for
the fiscal years ended December 31, 2002 and 2001, respectively.
All Other Fees
During the fiscal year ended December 31, 2002, the Company's principal
accountant did not provide any other services and accordingly did not bill the
Company any other fees. For the fiscal year ended December 31, 2001, the Company
paid its principal accountant $790 for other services.
Audit Committee
The Company's directors serve as its audit committee and, other than the
tax related fees, have approved all of the above amounts billed to the Company
prior to incurring the expenses associated therewith.
38
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: April 15, 2005 AFG ENTERPRISES, INC.
(Registrant)
By: /s/ Erich Spangenberg
----------------------------------
Erich Spangenberg, CEO
By: /s/ William P. Stelt
----------------------------------
William P. Stelt, CFO
39
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
AFG ENTERPRISES, INC.
Date: April 15, 2005 /s/ John B. Burns III
--------------------------------
John B. Burns, III, Director
Date: April 15, 2005 /s/ Douglass B. Croxall
--------------------------------
Douglas B. Croxall, Director
Date: April 15, 2005 /s/ Erich Spangenberg
--------------------------------
Erich Spangenberg, Director
Date: April 15, 2005 /s/ David Pridham
--------------------------------
David Pridham, Director
Date: April 15, 2005 /s/ Stephen Peary
--------------------------------
Stephen Peary, Director
40
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC.)
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001 and 2002
AND THE PERIOD FROM INCEPTION TO DECEMBER 31, 2002
WITH
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSEMS, INC.)
INDEX TO FINANCIAL STATEMENTS
AUDITED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2002 AND
FOR THE PERIOD FROM DECEMBER 30, 1992 (INCEPTION) THROUGH DECEMBER 31, 2002:
Report of Independent Registered Public Accounting Firm F-2
Balance Sheet as of December 31, 2001 and 2002 F-3
Statement of Operations for Years Ended December 31, 2001 and 2002, and for
the Period from December 30, 1992 (Inception) Through December 31, 2002 F-5
Statement of Changes in Stockholders' Equity (Deficit) For the Period from
December 30, 1992 (Inception) Through December 31, 2002 F-6
Statement of Cash Flows For Years Ended December 31, 2001 and 2002, and for
the Period from December 30, 1992 (Inception) Through December 31, 2002 F-13
Notes to Financial Statements F-15
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders AFG Enterprises, Inc. (Formerly In Store
Media Systems, Inc.)
We have audited the accompanying balance sheet of AFG Enterprises, Inc.
(formerly In Store Media Systems, Inc. - debtor-in-possession - a development
stage company) as of December 31, 2001 and 2002, and the related statements of
operations, changes in stockholders' equity (deficit) and cash flows for the
years then ended and for the period from December 30, 1992 (inception) through
December 31, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with standards of The Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AFG Enterprises, Inc. as of
December 31, 2001 and 2002 and the results of its operations and its cash flows
for the years then ended and for the period from December 30, 1992 (inception)
through December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company is in the development stage and has been
primarily involved in research and development activities, resulting in
significant losses and a stockholders' deficit at December 31, 2002 of
$1,738,377. These conditions raise substantial doubt about its ability to
continue as a going concern. Management's plans regarding those matters also are
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Denver, Colorado
February 3, 2005 CAUSEY DEMGEN & MOORE INC.
F-2
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 2001 and 2002
ASSETS
2001 2002
---- ----
Current assets:
Cash and cash equivalents $ 21,457 $ 4,688
Accounts receivable 3,224 --
Inventory 5,525 5,454
Other current assets 60,283 73,533
--------- --------
Total current assets 90,489 83,675
Property and equipment, at cost:
Office furniture and equipment
(Notes 10 and 12) 243,024 256,972
Leasehold improvements 55,228 55,228
--------- --------
298,252 312,200
Less accumulated depreciation and amortization (133,898) (168,370)
--------- --------
Net property and equipment 164,354 143,830
Other assets:
Debt issuance costs 356,667 --
Patent costs, net of accumulated amortization
of $31,436 (2001) and $39,862 (2002) 98,186 96,689
--------- --------
Net other assets 454,853 96,689
--------- --------
$ 709,696 $ 324,194
========= ========
See accompanying notes.
F-3
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 2001 and 2002
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
2001 2002
---- ----
Liabilities Not Subject to Compromise:
Current liabilities:
Accounts payable (Note 4) $ 823,869 $ 532
Accrued expenses 98,698 44,055
Interest payable 243,993 2,498
Notes payable (Notes 3 and 4) 487,500 --
Short-term notes payable (Note 3) 33,996 154,400
------------ -----------
Total current liabilities 1,688,056 201,485
Liabilities Subject to Compromise:
Pre-Petition Liabilities net of debt issuance
costs of $239,166 -- 1,861,086
Commitments and contingencies (Note 8)
Stockholders' equity (deficit) (Notes 3 and 6):
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 87,552,814
(2002) shares issued 80,378 87,553
Additional paid-in capital 19,740,240 21,349,560
Stock subscriptions received 350,000 325,000
Treasury stock, at cost; 9,374,742 shares (563,750) (563,750)
Deficit accumulated during the development stage (21,085,228) (23,436,740)
------------ -----------
Total stockholders' equity (deficit) (978,360) (1,738,377)
------------ -----------
$ 709,696 $ 324,194
============ ===========
See accompanying notes.
F-4
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
For the Years Ended December 31, 2001 and 2002
and for the Period from December 30, 1992 (inception) through December 31, 2002
Cumulative
amounts from
2001 2002 inception
------------ ------------ --------------
Revenues:
Coupon handling fees $ 18,506 $ 1,158 $ 19,664
Costs and expenses:
Research and development 43,071 1,714 3,320,137
General and administrative 3,136,796 1,980,930 11,608,110
Depreciation and amortization 43,509 44,426 381,267
------------ ------------ --------------
Total costs and expenses 3,223,376 2,027,070 15,309,514
------------ ------------ --------------
Operating loss (3,204,870) (2,025,912) (15,289,850)
------------ ------------ --------------
Other income (expense):
Interest income 15,892 20 105,872
Litigation settlement (Note 6) -- -- (156,250)
Restructuring charges (Note 10) (26,121) -- (222,632)
Debt conversion costs (Note 3) (631,512) (128,856) (1,437,198)
Gain/(loss) on sale of assets -- (2,316) (2,316)
Interest expense (806,657) (148,370) (5,577,630)
------------ ------------ --------------
Total other income (expense) (1,448,398) (279,522) (7,290,154)
------------ ------------ --------------
Loss before reorganization items (4,653,268) (2,305,434) (22,580,004)
Reorganization expense (Note 11) -- (16,078) (16,078)
------------ ------------ --------------
Net loss (Note 5) (4,653,268) (2,321,512) (22,596,082)
Preferred stock dividends 56,055 30,000 90,658
------------ ------------ --------------
Net loss applicable to common stockholders $ (4,709,323) $ (2,351,512) $ (22,686,740)
============ ============ ==============
Basic and diluted net loss per common
share (Note 5) $ (.07) $ (.03) $ (.44)
============ ============ ==============
Weighted average common shares
outstanding (Note 7) 65,800,000 73,900,000 51,100,000
============ ============ ==============
See accompanying notes.
F-5
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Period from December 30, 1992 (inception) through December 31, 2002
Additional
Preferred stock Common stock paid-in
Shares Amount Shares Amount capital
----------- ----------- ----------- ---------- -----------
Balance at December 30, 1992 (inception) -- $ -- -- $ -- $ --
Issuance of common stock in exchange for
assignment of patent and services in
1993 ($.001 per share)(Note 6) -- -- 30,462,375 30,462 (7,367)
Sale of common stock for cash
in 1993 ($.07 per share)(Note 6) -- -- 2,812,496 2,813 187,187
Sale of common stock for hardware,
software and lab time in 1993 ($.07 per
share)(Note 6) -- -- 1,125,000 1,125 77,625
Sale of common stock for cash
in 1993 ($.21 per share)(Note 6) -- -- 94,125 94 19,806
Sale of common stock for cash
in 1994 ($.08 per share)(Note 6) -- -- 5,861,005 5,861 479,139
Sale of common stock for cash
in 1995 ($.40 per share)(Note 6) -- -- 750,000 750 299,250
Exercise of warrants in 1995
($.26 per share) -- -- 19,320 19 5,038
Issuance of common stock for services
in 1995, less shares returned ($.24 per
share based on original shares issued)
(Note 6) -- -- 75,000 75 42,321
Exercise of warrants for cash
in 1995 ($.01 per share)(Note 6) -- -- 297,000 297 2,673
Exercise of warrants in 1996
($.20 per share) -- -- 22,680 23 5,987
Issuance of warrants in connection with
debt offering in 1996 (Note 3) -- -- -- -- 1,140,915
Deficit
accumulated
during the
Stock Treasury development
subscriptions stock stage Total
------------ --------- --------- ----------
Balance at December 30, 1992 (inception) $ -- $ -- $ -- $ --
Issuance of common stock in exchange for
assignment of patent and services in
1993 ($.001 per share)(Note 6) -- -- -- 23,095
Sale of common stock for cash
in 1993 ($.07 per share)(Note 6) -- -- -- 190,000
Sale of common stock for hardware,
software and lab time in 1993 ($.07 per
share)(Note 6) -- -- -- 78,750
Sale of common stock for cash
in 1993 ($.21 per share)(Note 6) -- -- -- 19,900
Sale of common stock for cash
in 1994 ($.08 per share)(Note 6) -- -- -- 485,000
Sale of common stock for cash
in 1995 ($.40 per share)(Note 6) -- -- -- 300,000
Exercise of warrants in 1995
($.26 per share) -- -- -- 5,057
Issuance of common stock for services
in 1995, less shares returned ($.24 per
share based on original shares issued)
(Note 6) -- -- -- 42,396
Exercise of warrants for cash
in 1995 ($.01 per share)(Note 6) -- -- -- 2,970
Exercise of warrants in 1996
($.20 per share) -- -- -- 6,010
Issuance of warrants in connection with
debt offering in 1996 (Note 3) -- -- -- 1,140,915
(Continued on following page)
See accompanying notes.
F-6
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Period from December 30, 1992 (inception) through December 31, 2002
(continued from preceding page)
Additional
Preferred stock Common stock paid-in
Shares Amount Shares Amount capital
-------- -------- ---------- -------- ---------
Settlement reached to repurchase 2,687,500
shares of common stock of the Company
in 1996 ($.02 per share)(Note 6) -- -- -- -- --
Sale of common stock for cash and
settlement of accounts payable in 1997
($.05 per share) -- -- 585,000 585 30,206
Issuance of warrants in connection with
debt offering in 1997 (Note 3) -- -- -- -- 361,201
Purchase of common stock by conversion of
note principal in 1997 ($.27 per share)(Note 3) -- -- 1,416,146 1,416 621,500
Purchase of common stock by conversion of
note interest in 1997 ($.27 per share)(Note 3) -- -- 108,241 108 28,756
Additional purchases of common stock for
cash in connection with note conversions
in 1997 ($.27 per share)(Note 3) -- -- 1,765,278 1,765 468,976
Net loss for the period from inception through
December 31, 1997 -- -- -- -- --
-------- -------- ---------- -------- ---------
Balance, December 31, 1997 -- -- 45,393,666 45,393 3,763,213
Issuance of warrants in connection with
debt offering (Note 3) -- -- -- -- 157,996
Issuance of common stock in exchange for
services ($.17 per share) -- -- 937,500 938 159,062
Sale of common stock for cash
in 1998 ($.13 per share) -- -- 2,250,000 2,250 297,750
Deficit
accumulated
during the
Stock Treasury development
subscriptions stock stage Total
------------ ---------- ------------- ----------
Settlement reached to repurchase 2,687,500
shares of common stock of the Company
in 1996 ($.02 per share)(Note 6) -- (43,750) -- (43,750)
Sale of common stock for cash and
settlement of accounts payable in 1997
($.05 per share) -- -- -- 30,791
Issuance of warrants in connection with
debt offering in 1997 (Note 3) -- -- -- 361,201
Purchase of common stock by conversion of
note principal in 1997 ($.27 per share)(Note 3) -- -- -- 622,916
Purchase of common stock by conversion of
note interest in 1997 ($.27per share)(Note 3) -- -- -- 28,864
Additional purchases of common stock for
cash in connection with note conversions
in 1997 ($.27 per share)(Note 3) -- -- -- 470,741
Net loss for the period from inception through
December 31, 1997 -- -- (8,031,938) (8,031,938)
------------ ---------- ------------- ----------
Balance, December 31, 1997 -- (43,750) (8,031,938) (4,267,082)
Issuance of warrants in connection with
debt offering (Note 3) -- -- -- 157,996
Issuance of common stock in exchange for
services ($.17 per share) -- -- -- 160,000
Sale of common stock for cash
in 1998 ($.13 per share) -- -- -- 300,000
(Continued on following page)
See accompanying notes.
F-7
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Period from December 30, 1992 (inception) through December 31, 2002
(continued from preceding page)
Additional
Preferred stock Common stock paid-in
Shares Amount Shares Amount capital
--------- ------------ ------------ ------------ ------------
Exercise of warrants by conversion of
note interest ($.14 per share)(Note 3) -- -- 56,250 56 3,694
Additional purchases of common stock for
cash in connection with note conversions
($.27 per share)(Note 3) -- -- 427,500 428 113,572
Purchase of common stock by conversion of
note principal and interest ($.52 per share)
(Note 3) -- -- 3,266,250 3,266 1,709,903
Exercise of warrants by conversion of
note principal and interest ($.52 per share)
(Note 3) -- -- 736,543 737 376,240
Cash received in connection with subsequent
conversion of note and interest to stock -- -- -- -- --
Issuance of common stock pursuant
to recapitalization (Note 6) -- -- 6,000,000 6,000 (6,000)
Settlement of accounts payable by the
issuance of common stock ($1.08 per
share) -- -- 26,977 27 29,218
Net loss for the year ended December
31, 1998 -- -- -- -- --
--------- ------------ ------------ ------------ -----------
Balance, December 31, 1998 -- -- 59,094,686 59,095 6,604,648
Purchase of common stock by conversion of
note principal and interest ($.73 per share)
(Note 3) -- -- 543,750 544 398,445
Exercise of warrants by conversion of
note principal and interest ($.53 per share)
(Note 3) -- -- 541,121 541 288,508
Deficit
accumulated
during the
Stock Treasury development
subscriptions stock stage Total
------------ --------- ------------- ----------
Exercise of warrants by conversion of
note interest ($.14 per share)(Note 3) -- -- -- 3,750
Additional purchases of common stock for
cash in connection with note conversions
($.27 per share)(Note 3) -- -- -- 114,000
Purchase of common stock by conversion of
note principal and interest ($.52 per share)
(Note 3) -- -- -- 1,713,169
Exercise of warrants by conversion of
note principal and interest ($.52 per share)
(Note 3) -- -- -- 376,977
Cash received in connection with subsequent
conversion of note and interest to stock 75,000 -- -- 75,000
Issuance of common stock pursuant
to recapitalization (Note 6) -- -- -- --
Settlement of accounts payable by the
issuance of common stock ($1.08 per
share) -- -- -- 29,245
Net loss for the year ended December
31, 1998 -- -- (1,890,976) (1,890,976)
------------ --------- ------------- ----------
Balance, December 31, 1998 75,000 (43,750) (9,922,914) (3,227,921)
Purchase of common stock by conversion of
note principal and interest ($.73 per share)
(Note 3) -- -- -- 398,989
Exercise of warrants by conversion of
note principal and interest ($.53 per share)
(Note 3) (75,000) -- -- 214,049
(Continued on following page)
See accompanying notes.
F-8
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Period from December 30, 1992 (inception) through December 31, 2002
(continued from preceding page)
Additional
Preferred stock Common stock paid-in
Shares Amount Shares Amount capital
-------- -------- ---------- ------ -----------
Sale of common stock for cash and in
exchange for stock offering services
($1.00 per share) (Note 6) -- -- 3,456,360 3,457 2,475,245
Exercise of warrants -- -- 116,250 116 18,884
Issuance of common stock for employee
compensation ($.90 per share) -- -- 50,000 50 44,950
Purchase of 6,687,242 treasury shares
($.08 per share) (Note 6) -- -- -- -- --
Issuance of common stock in settlement of
account payable ($1.00 per share) -- -- 26,360 26 26,334
Extension of exercise period of warrants
issued in connection with debt offerings -- -- -- -- 959,895
Net loss for the year ended December
31, 1999 -- -- -- -- --
-------- -------- ---------- ------ -----------
Balance, December 31, 1999 -- -- 63,828,527 63,829 10,816,909
Sale of common stock for cash
($1.00 per share) (Note 6) -- -- 50,000 50 49,950
Exercise of warrants (Note 6) -- -- 249,892 249 16,394
Issuance of common stock for employee
compensation ($.90 per share) (Note 6) -- -- 105,000 105 94,395
Warrants exercised on a cashless basis in
consideration for private stock offering
services ($.90 per share)(Note 6) -- -- 2,009,202 2,009 (2,009)
Deficit
accumulated
during the
Stock Treasury development
subscriptions stock stage Total
----------- ----------- -------------- ----------
Sale of common stock for cash and in
exchange for stock offering services
($1.00 per share) (Note 6) -- -- -- 2,478,702
Exercise of warrants -- -- -- 19,000
Issuance of common stock for employee
compensation ($.90 per share) -- -- -- 45,000
Purchase of 6,687,242 treasury shares
($.08 per share) (Note 6) -- (520,000) -- (520,000)
Issuance of common stock in settlement of
account payable ($1.00 per share) -- -- -- 26,360
Extension of exercise period of warrants
issued in connection with debt offerings -- -- -- 959,895
Net loss for the year ended December
31, 1999 -- (3,185,702) (3,185,702)
----------- ----------- -------------- ----------
Balance, December 31, 1999 -- (563,750) (13,108,616) (2,791,628)
Sale of common stock for cash
($1.00 per share) (Note 6) -- -- -- 50,000
Exercise of warrants (Note 6) -- -- -- 16,643
Issuance of common stock for employee
compensation ($.90 per share) (Note 6) -- -- -- 94,500
Warrants exercised on a cashless basis in
consideration for private stock offering
services ($.90 per share)(Note 6) -- -- -- --
(Continued on following page)
See accompanying notes.
F-9
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Period from December 30, 1992 (inception) through December 31, 2002
(continued from preceding page)
Additional
Preferred stock Common stock paid-in
Shares Amount Shares Amount capital
----------- ----------- ----------- ----------- -----------
Extension of exercise period of warrants issued
in connection with debt offerings (Note 6) -- -- -- -- (95,901)
Sale of preferred stock for cash (Note 6) 3 750,000 -- -- 750,000
Preferred stock dividends -- -- -- -- --
Intrinsic value of stock options granted to
officers of the Company (Note 6) -- -- -- -- 324,527
Conversion of notes payable into common stock
(Note 3) -- -- 1,389,000 1,389 895,675
Settlement of debenture payable (Note 6) -- -- -- -- 226,170
Net loss for the year ended
December 31, 2000 -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2000 3 750,000 67,631,621 67,631 13,076,110
Sale of common stock for cash ($.27 to $.36 per
share) (Note 6) -- -- 6,600,000 6,600 2,045,400
Preferred stock dividends -- -- -- -- --
Intrinsic value of stock options granted to employees
and fair value of stock options granted to
consultants (Note 6) -- -- -- -- 430,374
Conversion of notes payable into common
stock (Note 3) -- -- 2,715,000 2,715 1,866,040
Conversion of short-term note payable into common
stock (Note 3) -- -- 310,155 310 251,241
Extension of exercise period of warrants issued
in connection with debt offering (Note 6) -- -- -- -- 474,175
Deficit
accumulated
during the
Stock Treasury development
subscriptions stock stage Total
----------- ----------- ----------- -----------
Extension of exercise period of warrants issued
in connection with debt offerings (Note 6) -- -- -- (95,901)
Sale of preferred stock for cash (Note 6) -- -- (750,000) 750,000
Preferred stock dividends -- -- (4,603) (4,603)
Intrinsic value of stock options granted to
officers of the Company (Note 6) -- -- -- 324,527
Conversion of notes payable into common stock
(Note 3) -- -- -- 897,064
Settlement of debenture payable (Note 6) -- -- -- 226,170
Net loss for the year ended
December 31, 2000 -- -- (2,512,686) (2,512,686)
------------ ------------ ------------ ------------
Balance, December 31, 2000 -- (563,750) (16,375,905) (3,045,914)
Sale of common stock for cash ($.27 to $.36 per
share) (Note 6) -- -- -- 2,052,000
Preferred stock dividends -- -- (56,055) (56,055)
Intrinsic value of stock options granted to employees
and fair value of stock options granted to
consultants (Note 6) -- -- -- 430,374
Conversion of notes payable into common
stock (Note 3) -- -- -- 1,868,755
Conversion of short-term note payable into common
stock (Note 3) -- -- -- 251,551
Extension of exercise period of warrants issued
in connection with debt offering (Note 6) -- -- -- 474,175
(Continued on following page)
See accompanying notes.
F-10
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Period from December 30, 1992 (inception) through December 31, 2002
(continued from preceding page)
Additional
Preferred stock Common stock paid-in
Shares Amount Shares Amount capital
----------- ----------- ----------- ----------- -----------
Sales of common stock for cash ($.75 per share)
(Note 6) -- -- 2,292,000 -- --
Net retirement of stock and cash paid upon merger
with E. Schulze Corp. (Note 6) -- -- (2,292,000) -- --
Stock issued to consultants for services (Note 6) -- -- 542,500 543 573,882
Sales of common stock for cash ($.75 per share)
(Note 6) -- -- 403,999 404 302,596
Exercise of warrants (Note 6) -- -- 513,039 513 82,084
Conversion of preferred stock into common stock
(Note 6) (1) (250,000) 661,926 662 249,338
Issuance of common stock for debt issuance
costs ($.39 per share) (Note 6) -- -- 1,000,000 1,000 389,000
Stock subscription received for the purchase
of 810,186 shares of common stock (Note 6) -- -- -- -- --
Net loss for the year ended
December 31, 2001 -- -- -- -- --
----------- ----------- ----------- ----------- -----------
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 $40,665 (Note 6) -- -- 2,261,716 2,262 779,924
Preferred stock dividends -- -- -- -- --
Intrinsic value of stock options granted to
officers of the Company (Note 6) -- -- -- -- 12,600
Value of stock options granted to
consultants (Note 6) -- -- -- -- 45,180
Cancellation of common stock issued to consultants -- -- (100,000) (100) 100
Conversion of notes payable into common
stock (Note 3) -- -- 837,712 838 438,694
Extension of exercise period of warrants issued
in connection with debt offering (Note 3) -- -- -- -- (74,108)
Deficit
accumulated
during the
Stock Treasury development
subscriptions stock stage Total
----------- ----------- ----------- -----------
Sales of common stock for cash ($.75 per share)
(Note 6) -- 1,719,000 -- 1,719,000
Net retirement of stock and cash paid upon merger
with E. Schulze Corp. (Note 6) -- (1,719,000) -- (1,719,000)
Stock issued to consultants for services (Note 6) -- -- -- 574,425
Sales of common stock for cash ($.75 per share)
(Note 6) -- -- -- 303,000
Exercise of warrants (Note 6) -- -- -- 82,597
Conversion of preferred stock into common stock
(Note 6) -- -- -- --
Issuance of common stock for debt issuance
costs ($.39 per share) (Note 6) -- -- -- 390,000
Stock subscription received for the purchase
of 810,186 shares of common stock (Note 6) 350,000 -- -- 350,000
Net loss for the year ended
December 31, 2001 -- -- (4,653,268) (4,653,268)
----------- ----------- ----------- -----------
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 6) (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) -- -- -- 45,180
Cancellation of common stock issued to consultants -- -- -- --
Conversion of notes payable into common
stock (Note 3) -- -- -- 439,532
Extension of exercise period of warrants issued
in connection with debt offering (Note 3) -- -- -- (74,108)
(Continued on following page)
See accompanying notes.
F-11
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Period from December 30, 1992 (inception) through December 31, 2002
(continued from preceding page)
Additional
Preferred stock Common stock paid-in
Shares Amount Shares Amount capital
----------- ----------- ----------- ----------- -----------
Stock subscription received for the purchase
of 2,752,315 shares of common stock (Note 6) -- -- -- -- --
Sale of common stock to three individuals (Note 6) -- -- 1,451,146 1,451 233,549
Sale of common stock to individuals net of offering
costs of $3,789 (Note 6) -- -- 424,000 424 33,681
Issuance of common stock previously purchased and
recorded as stock subscription receivable (Note 6) -- -- 2,000,000 2,000 98,000
Common stock issued to consultants (Note 6) -- -- 300,000 300 11,700
Value of stock options granted to
lender (Note 6) -- -- -- -- 30,000
Net loss for the twelve months ended
December 31, 2002 -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2002 2 $ 500,000 87,552,814 $ 87,553 $21,349,560
=========== =========== =========== =========== ===========
Deficit
accumulated
during the
Stock Treasury development
subscriptions stock stage Total
------------ ------------ ------------ -----------
Stock subscription received for the purchase
of 2,752,315 shares of common stock (Note 6) 370,000 -- -- 370,000
Sale of common stock to three individuals (Note 6) (120,000) -- -- 115,000
Sale of common stock to individuals net of offering
costs of $3,789 (Note 6) -- -- -- 34,105
Issuance of common stock previously purchased and
recorded as stock subscription receivable (Note 6) (100,000) -- -- 2,098,000
Common stock issued to consultants (Note 6) -- -- -- 12,000
Value of stock options granted to
lender (Note 6) -- -- -- 30,000
Net loss for the twelve months ended
December 31, 2002 -- -- (2,321,512) (2,321,512)
------------ ------------ ------------ -----------
Balance, December 31, 2002 $ 325,000 $ (563,750) $(23,436,740) $(1,738,377)
============ ============ ============ ===========
See accompanying notes.
F-12
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2001 and 2002
and for the Period from December 30, 1992 (inception) through December 31, 2002
Cumulative
amounts
from
2001 2002 inception
-------------- -------------- --------------
Cash flows from operating activities:
Net loss $ (4,653,268) $ (2,321,512) $ (22,596,082)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 43,509 44,426 381,267
Loss on disposal of fixed assets -- 2,316 2,316
Restructuring charges 26,121 -- 222,632
Common stock issued for services, patents,
payables and extension of warrants 2,110,486 124,528 4,424,033
Amortization of debt issuance costs 169,391 147,501 1,877,404
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) 3,224 (63,860)
Inventory 400 71 (109,834)
Other assets (16,013) (13,250) (73,533)
Accounts payable 226,539 340,422 1,164,291
Interest payable (34,520) 60,169 951,640
Other liabilities 50,033 247,266 345,964
-------------- -------------- --------------
Total adjustments 2,572,722 956,673 9,366,631
-------------- -------------- --------------
Net cash used in operations (2,080,546) (1,364,839) (13,229,451)
Cash flows from investing activities:
Purchase of property and equipment (114,410) (1,342) (382,780)
Proceeds from sale of property and equipment -- -- 125,000
Decrease (increase) in advances - related party 46,658 -- (244,311)
Patent costs (18,941) (6,929) (136,549)
Lease deposits -- -- (27,880)
Debt issuance costs -- -- (10,000)
-------------- -------------- --------------
Net cash used in investing activities (86,693) (8,271) (676,520)
Cash flows from financing activities:
Proceeds from sale of common stock 4,506,597 1,056,290 9,204,534
Purchase of treasury stock (1,719,000) -- (520,000)
Proceeds from preferred stock -- -- 750,000
Preferred stock dividends (56,055) (20,000) (80,658)
Repayments of stockholder loans (251,000) -- --
Repayments of capital leases -- -- (14,087)
Proceeds from notes payable 175,893 320,051 5,540,818
Repayments of notes payable (658,778) -- (969,948)
-------------- -------------- --------------
Net cash provided by financing activities 1,997,657 1,356,341 13,910,659
-------------- -------------- --------------
Net increase (decrease) in cash (169,582) (16,769) 4,688
Cash and cash equivalents at beginning of period 191,039 21,457 --
-------------- -------------- --------------
Cash and cash equivalents at end of period $ 21,457 $ 4,688 $ 4,688
============== ============== ==============
(Continued on following page)
See accompanying notes.
F-13
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2001 and 2002
and for the Period from December 30, 1992 (inception) through December 31, 2002
(Continued from preceding page)
Supplemental disclosure of cash flow information:
Cumulative
amounts
from
2001 2002 inception
------------ ------------ ------------
Cash paid during period for
interest $ 174,468 $ -- $ 1,362,414
Supplemental disclosure of non-cash financing
activities:
Cumulative
amounts
from
2001 2002 inception
------------ ------------ ------------
Common stock issued for:
Services, patents and payables $ 574,425 $ 12,000 $ 1,009,991
Conversion of notes payable 1,030,469 200,000 3,813,719
Conversion of interest 458,325 110,667 868,388
Cancellation of notes payable -- -- 300,000
Debt issuance costs 390,000 30,000 420,000
Debt conversion costs 631,512 128,856 1,179,304
------------ ------------ ------------
$ 3,084,731 $ 481,523 $ 7,591,402
============ ============ ============
Warrants issued in debt offer:
Additional paid-in capital $ 474,175 $ (74,108) $ 2,924,173
Expensed as interest (474,175) 74,108 (2,924,173)
Capital leases recorded:
Purchase of fixed assets $ -- $ -- $ 261,967
Obligations under capital lease -- -- (261,967)
Compensation recorded upon
grant of stock options $ 430,374 $ 57,780 $ 812,681
See accompanying notes.
F-14
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2002
1. Organization and summary of significant accounting policies
Organization:
In Store Media Systems, Inc., a Nevada corporation, was organized on
December 30, 1992 to develop a system for distributing and electronically
clearing coupons. The Company developed and patented the Coupon Exchange
Center (TM) and the Coupon Bank(TM) System, which are hardware based
electronic clearing systems. In November 2001, the Company acquired the
rights to market and sell the patented and proprietary
coupon-merchandising program of Let's Go Shopping, Inc., which it has
incorporated into the Company's Budget Saver(TM) program. The Company is
considered to be a development stage enterprise as more fully defined in
Statement No. 7 of the Financial Accounting Standards Board. Activities
from inception include research and development activities, seeking
patents, as well as fund raising.
On October 8, 1998, the Company consummated an agreement and plan of
merger with Crescent Gold (Crescent), in which Crescent acquired all of
the issued and outstanding common shares of the Company (See Note 6). The
Company was merged into Crescent, and Crescent changed its name to In
Store Media Systems, Inc. For accounting purposes, the acquisition has
been treated as a recapitalization of the Company, based upon historical
cost, a reverse acquisition with the Company as the acquirer. The Company
owns 100% of Data Driven Marketing, Inc., which has had no activity
through December 31, 2002.
On November 12, 2002 (the "Petition Date"), the Company filed a voluntary
petition for reorganization under Chapter 11 of the United States
Bankruptcy Code (the "Restructuring Proceedings") in the United States
Bankruptcy Court for the District of Colorado (the "Bankruptcy Court"),
seeking to restructure its operations and obligations (the
"Restructuring") in response to a lawsuit (the "LGS Lawsuit") filed by
LGS, whom the Company believed was obligated to provide technology,
intellectual property and services to the Company under the terms of a
license agreement entered into by the Company and the third party. As a
result of the filing of the Restructuring Proceedings, the Company was
entitled to protection from its creditors. See Note 12-"Subsequent
Events". As part of the Restructuring Proceedings, the Company has changed
its name to AFG Enterpirses, Inc.
The accompanying consolidated financial statements have been prepared in
accordance with AICPA Statement of Position 90-7 ("SOP 90-7"), "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code" and on
a going concern basis, which contemplates continuity of operations and
realization of assets and liquidation of liabilities in the ordinary
course of business. However, as a result of the Restructuring Proceedings,
such realization of assets and liquidation of liabilities, without
substantial adjustments and/or changes of ownership, is highly uncertain.
While operating as a debtor-in-possession ("DIP") under the protection of
Chapter 11 of the Bankruptcy Code, and subject to approval of the
Bankruptcy Court, or otherwise as permitted in the ordinary course of
business, the Debtor, may sell or otherwise dispose of assets and
liquidate or settle liabilities for amounts other than those reflected in
the financial statements. Further, a plan of reorganization could
materially change the amounts and classifications in the historical
financial statements. See Note 12 - "Subsequent Events".
F-15
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2002
1. Organization and summary of significant accounting policies (continued)
Basis of presentation and management's plans:
The Company is operating its business as a DIP (the "Debtor") subject to
the provisions of the Bankruptcy Code. The appropriateness of using the
going concern basis for the Company's financial statements is dependent
upon, among other things: (i) the Company's ability to comply with the
terms of the DIP credit facility which was approved by the Court on July
15, 2003 (the "DIP Facility") and provided to the Company by Acclaim
Financial Group Venture II, LLC ("AFGVII") and any cash management order
entered by the Bankruptcy Court in connection with the Restructuring
Proceedings; (ii) the ability of the Company to maintain adequate cash on
hand to fund its operations; (iii) the ability of the Company to generate
cash from operations or the sale of assets; (iv) confirmation of a plan of
reorganization under the Bankruptcy Code; and (v) the Company's ability to
achieve profitability following such confirmation. See Note 12-"Subsequent
Events".
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.
Reorganization Under Chapter 11:
On November 12, 2002, the Company filed a voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code in
the Bankruptcy Court. The Restructuring was initiated in response to the
LGS Litigation. Under the Restructuring Proceedings, the Company expects
to develop and implement a plan for resolving the LGS Litigation and
establishing a plan for its long term viability.
The Company has minimal operations, but all contractors and vendors are
being paid for all goods furnished and services provided after the
Petition Date. However, as a consequence of the Restructuring Proceedings,
pending litigation against the Debtor as of the Petition Date is stayed
and no party may take any action to pursue or collect pre-petition claims
except pursuant to an order of the Bankruptcy Court. It is the Company's
intention to address pre-petition claims through a plan of reorganization
under the Bankruptcy Code.
Pursuant to the Bankruptcy Code, the Debtor has filed schedules with the
Bankruptcy Court setting forth the assets and liabilities of the Debtor as
of the Petition Date. In connection with the filing of the Bankruptcy
Case, the Company issued proof of claim forms to known creditors, vendors
and other parties with whom the Company has previously conducted business.
To the extent that recipients disagree with the claims as quantified on
these forms, the recipient may file discrepancies with the Bankruptcy
Court. Differences between amounts recorded by the Debtors and claims
filed by creditors will be investigated and resolved as part of the
Restructuring Proceedings. The Bankruptcy Court ultimately will determine
liability amounts that will be allowed for these claims in the Chapter 11
Cases. A June 10, 2003 bar date was set for the filing of proofs of claim
against the Company. Because the Debtors have not completed evaluation of
the claims received in connection with this process, the
F-16
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2002
1. Organization and summary of significant accounting policies (continued)
ultimate number and allowed amount of such claims are not presently known.
The resolution of such claims could result in a material adjustment to the
Company's financial statements.
Approximately 41 proofs of claim totaling approximately $1,937,423
alleging a right to payment from the Company were filed in connection with
the June 10, 2003 bar date, including unsecured claims totaling $1,795,960
as well as potentially significant claims classified as "unknown" or
"unliquidated". The resolution of such claims could result in a material
adjustment to the Company's financial statements.
Use of estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Income taxes:
The Company provides for income taxes utilizing the liability approach
under which deferred income taxes are provided based upon enacted tax laws
and rates applicable to the periods in which the taxes become payable.
Inventory:
Inventory consists of electronics and computer components to be used in
the Company's product. Inventory is stated at lower of cost or market,
determined by the first in-first out method.
Property and equipment:
Property and equipment is recorded at cost. Depreciation commences as
items are placed in service and is computed using straight-line and
accelerated methods over their estimated useful lives of five to seven
years or the term of the lease for leasehold improvements. Maintenance and
repairs are expensed as incurred, and improvements and major renewals are
capitalized.
Patent costs:
Patents are stated at cost less accumulated amortization which is
calculated on a straight-line basis over the useful lives of the assets,
estimated by management to average 16 years. Research and development
costs and any costs associated with internally developed patents (with the
exception of legal costs which are capitalized) and costs incurred to
establish the technological feasibility of computer software are expensed
in the year incurred.
F-17
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2002
1. Organization and summary of significant accounting policies (continued)
Impairment of long-lived assets:
The Company evaluates the potential impairment of long-lived assets in
accordance with Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. The
Company annually reviews the amount of recorded long-lived assets for
impairment. If the sum of the expected cash flows from these assets is
less than the carrying amount, the Company will recognize an impairment
loss in such period.
Stock options:
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 Accounting for Stock-Based
Compensation. Accordingly, compensation is recorded only when the quoted
market price of the Company's stock at the date of grant exceeds the
amount an employee must pay to acquire the stock.
Advertising costs:
The Company expenses the costs of advertising as incurred. Advertising
expense was $595,440 and $110,855 for the years ended December 31, 2001
and 2002, respectively.
Cash equivalents:
For the purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months
or less to be cash equivalents.
Concentrations of credit risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents. The Company's excess cash is deposited in liquid low-risk
interest bearing accounts within high quality national financial
institutions. At December 31, 2001 and at times during the year 2002, the
balance at one financial institution exceeded the FDIC limits.
Recent accounting pronouncements:
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations". SFAS No. 141 requires the use of the purchase method of
accounting for all business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interest method. The adoption of SFAS No. 141
did not have a material effect on the Company's results of operations or
financial position.
F-18
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2002
1. Organization and summary of significant accounting policies (continued)
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 requires that goodwill and other intangible assets
with indefinite lives no longer be amortized, but instead tested for
impairment at least annually. In addition, the standard addresses how
intangible assets that are acquired individually or with a group of other
assets, other than as part of a business combination, should be accounted
for upon their acquisition. The adoption of SFAS No. 142 effective January
1, 2002 did not have a material effect on the Company's results of
operations or financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. This statement supersedes FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", and the accounting and reporting provisions of
APB Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of a Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions", for the
disposal of a segment of a business (as previously defined in that
Opinion). The adoption of SFAS No. 144 effective January 1, 2002 did not
have a material effect on the Company's results of operations or financial
position.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". FIN 45 requires
that a liability be recorded in the guarantor's balance sheet upon
issuance of a guarantee. In addition, FIN 45 requires certain disclosures
about each of the entity's guarantees. The disclosure provisions of FIN 45
are effective for annual and interim periods that end after December 15,
2002. The recognition provisions of FIN 45 are applicable prospectively to
guarantees entered after December 31, 2002. The Company does not believe
that the adoption of FIN 45 will have a material effect on its results of
operations or financial position.
In June 2003, the FASB approved SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity". SFAS No. 150 establishes standards for how an issuer classifies
and measures certain financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The Company does not expect
adoption of SFAS No. 150 to have any impact on its financial statements.
In December 2003, the FASB issued a revised Interpretation No. 46,
"Consolidation of Variable Interest Entities". The interpretation
clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements" to certain types of variable interest
entities. The Company does not expect the adoption of this interpretation
to have any impact on its financial statements.
2. Note receivable
Through December 31, 2000, the Company had advanced $46,658 to a company
owned by the former president of the Company. During 2001, this advance
was fully reimbursed to the Company.
F-19
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2002
3. Notes payable
Effective February 14, 1996, the Company initiated a private offering of
16 (the minimum) to 200 units with each unit consisting of a $25,000
convertible Promissory Note ("Notes") and warrants to purchase 56,250
shares of the Company's common stock. During the years ended December 31,
1996, 1997 and 1998, the Company sold an aggregate of 170 units and issued
notes payable of $3,040,000, $962,500 and $247,500, respectively. The term
of the Notes was one year from date of issue and they bore interest at the
rate of 9% per annum payable quarterly. The warrants consisted of 18,750
"A", "B", and "C" warrants to purchase shares of the Company's stock at an
exercise price of $.07; $.67; and $1.33 per share, respectively. In
addition, the Company has granted to a broker/dealer "A", "B", and "C"
warrants equal to 10% of the warrants included in the units at the same
price and also granted to an attorney 575,000 warrants to purchase common
stock at $.67 per share exercisable for a period of five years from
December 4, 1995. These warrants have been reclassified in these financial
statements as stock options do to the nature of the transaction and are
properly reflected as such in the tables in Note 6. The Company has also
paid the broker/dealer a 10% selling commission and a 3% non-accountable
expense allowance on each unit sold in conjunction with the offering, and
has issued warrants to purchase 1,875,000 shares of the Company's stock to
a consultant who facilitated the offering. The exercise price for these
warrants is approximately $.05 per share and are exercisable for a period
of five years from date of the close of the offering. The warrants issued
to the note holders were valued at $1,069,996 and have been reflected as
additional paid-in capital and a discount, proportionate to the issuance
of the notes, which is being amortized over the one-year term of the
notes. The warrants issued to the consultant and the attorney were valued
at $397,500 and have been reflected as additional paid-in capital and debt
issuance costs, proportionate to the issuance of the notes, which is being
amortized to interest expense over the one-year term of the notes.
In April of 1997, the Company requested note holders to extend the due
date of the Notes. Note holders representing 62 Notes agreed to extensions
of between 120 and 180 days. As of September 30, 1997, the Company had
repaid $5,000 toward Notes which matured and were not extended. In
consideration of a selling agent's assistance in getting note holder
extensions, the Company agreed to pay a 5% cash commission and 5% of the
warrants issued in connection with the Notes that were extended. The
selling agent was issued 380,881 "A", "B", and "C" warrants. The warrants
were valued at $127,500 and were treated as additional paid-in capital and
debt issuance costs which are amortized to interest expense during 1997,
1998 and 1999. All A, B, and C warrants that were not exercised during
2001 were extended to June 30, 2002. As of June 30, 2002, no such warrants
had been exercised and the warrants expired.
In a letter to the 1996 note holders in July 1997, the Company offered the
note holders the opportunity to purchase the Company's restricted common
stock at $0.27 per share with the principal of their notes, the accrued
interest and/or additional cash. In 1997, $377,639 of the principal
purchased 1,416,146 shares of common stock, $28,864 of the accrued
interest purchased 108,241 shares of common stock and $470,741 of
additional cash sales purchased 1,765,278 shares of common stock.
F-20
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2002
3. Notes payable (continued)
The additional shares received as compared to the conversion provisions in
the note have been reflected as debt conversion costs amounting to
$257,894. In January and February of 1998, the short-term note holders
purchased 427,500 of the Company's shares of common stock with $114,000 of
cash, or $0.27 per share.
During 1998 and 1999, the Company offered its note holders the opportunity
to convert their note principal, accrued interest and warrants into shares
of common stock. The note holders purchased 3,266,250 and 543,750 shares
of common stock in consideration for $1,006,250 and $141,250 in note
principal, $116,062 and $22,989 of accrued interest and cash of $735,750
and $148,750 less offering costs of $144,893 and $0, respectively. In
connection with the revised terms of the note conversion offer, the
Company recognized debt conversion costs of $0 and $86,000 for the years
ended December 31, 1998 and 1999, respectively.
During 1998 and 1999, the Company offered its note holders the opportunity
to exercise their warrants using note principal and interest. The note
holders purchased 736,543 and 541,121 shares of common stock in
consideration for $370,500 and $227,500 in note principal, $59,827 and
$40,299 of accrued interest less offering costs of $53,350 and $0,
respectively. In connection with the warrant exercise offer in 1998 and
1999, the Company issued a net of 41,983 and 48,207 new warrants valued at
$20,000 and $21,250, respectively, and reflected as debt conversion costs.
During 2000 and 2001 the Company offered its note holders the option to
extend their notes and accrued interest until October 31, 2001 or to
convert their notes and exercise their warrants by using the balance of
their note principal and accrued interest. Note holders converted $460,111
and $904,976 of note principal and $145,267 and $332,267 of interest into
1,389,000 and 2,715,000 shares of the Company's common stock during 2000
and 2001, respectively. In connection with the revised terms of the note
conversion offer, the Company recognized conversion costs of $291,686 and
$631,512, respectively in 2000 and 2001. Additionally, during 2001, the
Company repaid notes totaling $411,922 including accrued interest of
$124,422.
During 1998, the Company initiated a private offering of a maximum of
$800,000 of Promissory Notes bearing interest at 10% per annum and
warrants to purchase 320,000 shares of common stock exercisable at $1.00
per share for one year. As of December 31, 1998, $350,000 had been raised
and
F-21
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2002
3. Notes payable (continued)
140,000 warrants were issued. The warrants issued were valued at $65,116
and have been reflected as additional paid-in capital and a discount on
the issuance of the notes which was amortized over the one-year term of
the notes. During 1999, $300,000 in principal of these notes were used to
purchase 3 units of the November 1998 private placement of common stock.
(See Note 6).
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. Due to the beneficial conversion privilege,
$125,493 was recorded as debt issuance costs. On June 7, 2001, the
shareholder/director elected to convert the note and $565 of accrued
interest into 310,155 shares of the Company's common stock.
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 $.35 per share. These shares were
purchased under the same terms and conditions as those within the
Company's offering of the 2002 Units discussed previously.
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 had the option of extending
their note and accrued interest to October 31, 2002. In consideration for
extending their note, each noteholder received 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 had 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 received 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
expired on December 31, 2002. During the year ended December 31, 2002,
notes totaling $75,000 were extended and notes totaling $310,676,
including accrued interest of $110,676 were converted into 837,712 shares
of the Company's common stock. The Company recorded an expense of $128,856
as debt conversion costs in recognition of the beneficial conversion terms
offered.
In October 2002, the Company borrowed $100,000 from a shareholder of the
Company bearing interest at 18% per annum with the option of purchasing
1,000,000 shares of stock in lieu of receiving interest under the note.
The loan is collateralized by a collateral assignment of all litigation
F-22
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2002
3. Notes payable (continued)
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.
During 2002, the Company also borrowed $39,647 from directors and former
directors of the Company.
During 2001, notes of $91,000, $30,000 and $130,000 plus accrued interest
payable to the Company's former president, the Company's president and a
partnership in which the Company's president is the general partner,
respectively, were paid to note holders or the notes were converted into
equity.
Notes payable at December 31, 2001 and 2002 consisted of the following:
2001 2002
--------- ---------
9% Notes payable, interest payable quarterly, principal past due,
unsecured, in default at December 31, 2001
and 2002 - reclassified as pre-petition liability in 2002 $ 437,500 $ --
10% Notes payable, interest payable quarterly, principal past due,
unsecured, in default at December 31, 2001
and 2002 - reclassified as pre-petition liability in 2002 50,000 --
--------- ---------
$ 487,500 $ --
========= =========
Short term notes payable at December 31, 2001 and 2202 consisted of the
following:
2001 2002
--------- ---------
18% Note payable, secured, to a shareholder related to the
former president of the Company $ -- $ 100,000
6.75% Note payable to an insurance finance company,
payable in monthly installments of $6,216 including interest
through July 10, 2003 33,996 54,400
--------- ---------
(2002 weighted average interest rate 14.04%) $ 33,996 $ 154,400
========= =========
4. Pre-Petition Liabilities
As a result of filing for Chapter 11 bankruptcy on November 12, 2002, the
Company has segregated its liabilities into two categories: 1) Liabilities
subject to compromise and 2) Liabilities not subject to compromise.
Liabilities subject to compromise are principally pre-petition obligations
which may be settled at amounts different from the originally recorded
amounts as part of the plan of reorganization. Such treatment is
consistent with Statement of Position 90-7 Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code issued by the Accounting
Standards Executive Committee in November 1990.
F-23
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2002
4. Pre-Petition Liabilities (continued)
As of December 31, 2001 and 2002, pre-petition liabilities subject to
compromise consisted of the following:
At December 31, 2002, the Company has a net operating tax loss
carryforward of approximately $14,437,600, future tax deductions of
$3,594,900 which may be used to offset future taxable income, and unused
tax credits of $274,000. The future tax deductions result from
capitalizing pre-operating costs for income tax reporting purposes and
expensing these costs for financial statement purposes. Differences
between the book and tax net operating loss carryforward consists
primarily of the above plus valuation of warrants and stock issued in
connection with notes payable and for services. The loss carryforward will
be reduced in future periods to the extent of any debt discharged as a
result of an approved plan of reorganization. The net operating tax loss
carryforward (prior to bankruptcy adjustments) expires as follows:
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2002
5. Income Taxes (continued)
At December 31, 2001 and 2002, total deferred tax assets and valuation
allowance are as follows:
2001 2002
----------- -----------
Deferred tax assets resulting from:
Net operating loss carryforwards $ 3,650,000 $ 5,385,000
Capitalized pre-operating costs 2,235,000 1,341,000
Research and development tax credits 270,000 274,000
----------- -----------
Total 6,155,000 7,000,000
Less valuation allowance (6,155,000) (7,000,000)
----------- -----------
$ -- $ --
=========== ===========
A 100% valuation allowance has been established against the deferred tax
assets, as utilization of the loss carryforwards and realization of other
deferred tax assets cannot be reasonably assured.
6. Stockholders' equity
Recapitalization:
On October 8, 1998, the Company entered into an agreement and plan of
merger with Crescent to exchange all of the issued and outstanding common
shares of the Company, in exchange for approximately 44,000,000 shares of
Crescent's $.01 par value common stock, in a reverse acquisition.
Pursuant to the agreement, Crescent agreed to have no unpaid liabilities
at the effective date of the transaction. The exchange was consummated on
October 8, 1998, and is presented on the statement of changes in
stockholders' equity (deficit) as an issuance of 6,000,000 shares of
common stock for cash proceeds of $0 pursuant to recapitalization. The net
effect of this transaction was to record an increase in common stock and
related decrease to additional paid-in capital of $6,000.
Following the exchange, the Company's shareholders owned approximately 88%
of the outstanding common stock of Crescent. The reverse acquisition has
been accounted for as a recapitalization of the Company based upon
historical cost. Accordingly, the number of authorized and issued common
shares, par value of common stock and additional paid-in capital have been
restated on the balance sheet and the statement of stockholders' equity to
give retroactive effect to the recapitalization.
Capital contributions:
During the year ended December 31, 1993, 30,462,375 shares of the
Company's common stock was issued in exchange for assignment of patents
and services valued at $23,095, 2,812,496 shares were issued to Peter
Indovina, et al for $190,000 cash, 94,125 shares were issued for $19,900
in cash, and 1,125,000 shares were issued to two vendors who provided an
aggregate of $78,750 of hardware,
F-25
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2002
6. Stockholders' equity (continued)
software, laboratory time, and man hours for the development of the coupon
exchange prototype which is included in research and development expense
on the statement of operations. Additionally, the Company included in
"units" sold in conjunction with a private offering memorandum, 30,900
warrants to purchase one share each of common stock for $.267. In the
aggregate, 19,320 of these warrants were exercised and the balance have
expired.
During 1994, the Company sold 2,437,500 shares of common stock to
HealthStar, Inc. for $250,000 in cash, 3,374,755 shares to Peter Indovina,
et al for $225,000 in cash, and 48,750 shares to others for $10,000 in
cash.
During the year ended December 31, 1995, 250,000 and 500,000 shares were
sold to HealthStar, Inc. and Peter Indovina, et al, respectively, at $.40
per share and in addition, 1,500,000 warrants to purchase one share of
common stock at $.67 per share were issued for a total of $300,000 cash.
The warrants expired in 1997.
During 1995, 187,500 shares were issued to an employee of the Company for
services performed valued at $42,396. In November 1996, the Company
recovered the unvested portion of the shares which amounted to 112,500 of
the 187,500 shares issued.
During 1995, the Company issued 297,000 shares of its common stock upon
conversion of warrants issued in consideration for a bridge loan at $.01
per share. As settlement of the Company's lawsuit against HealthStar, Inc.
and Thomas Stateman (HealthStar/Stateman ), in 1996 the Company recovered:
2,687,500 shares of its common stock; warrants to purchase 666,666 shares;
and, all royalty rights by issuing a note payable to HealthStar for
$700,000. This note also replaced a previous note of $656,250 resulting in
an increase of $43,750 which amount has been reflected as treasury stock.
The Company and HealthStar then jointly sued Continium Technology
Corporation (Continium) and further modifications of the note were made. A
loss on litigation of $156,250 has been recorded in the accompanying
financial statements in 1997.
The Company also accepted an offer of settlement of its lawsuit against
Peter Indovina, et al. The Settlement gave the Company the right to
recover 6,687,242 shares of the Company's stock, warrants to purchase the
Company's stock and certain royalties payable by the Company. The Company
exercised its right during 1999 by the payment of $520,000 in cash.
In 1997 and 1998, the Company issued 3,289,665 and 4,430,293 shares
respectively, under the offering of convertible debt outlined in Note 3.
During 1998, the Company issued 937,500 shares of its common stock in
exchange for services valued at $.17 per share. This issuance includes the
750,000 shares issued to the attorney in the Continuum/HealthStar lawsuit.
During November 1998, the Company commenced a private placement of common
stock and warrants. The Company proposed to sell a minimum of 18 units and
a maximum of 68 units at a price of $100,000 per unit that would have
resulted in gross proceeds to the company of
F-26
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2002
6. Stockholders' equity (continued)
between $1,800,000 and $6,800,000 before deducting offering expenses. Each
unit consisted of 100,000 shares of common stock and warrants to purchase
100,000 shares of common stock exercisable at $1.25 per share and expire
between June 30, 2001 and January 31, 2002. During 2001, the exercise
period of these warrants was extended to June 30, 2002 at which time they
expired.
Through December 31, 1999, 29.36 units were sold resulting in gross
proceeds of $2,936,360 (including conversion of note principal of
$300,000, reduction of accounts payable of $100,000 and cash of
$2,500,000). Offering costs of $457,658 were incurred for the 29.36 units.
In addition, 520,000 shares of common stock and 520,000 warrants were
issued as commissions.
During 2000, the Company issued 249,892 shares of common stock upon the
exercise of warrants resulting in proceeds of $16,643. Warrants
representing 2,009,202 shares of common stock were exercised on a cashless
basis pursuant to a settlement with a selling agent in a private stock
offering. These warrants were issued in connection with the sale of common
stock in a private placement.
During January 2000, the Company sold .5 unit in a private placement
resulting in proceeds to the Company of $50,000. The .5 unit consisted of
50,000 shares of common stock and warrants to purchase 50,000 shares of
common stock exercisable at $1.25 per share until January 2002. As of
December 31, 2000, the Company concluded this offering.
On March 29, 2000, the board of directors authorized the sale of up to 14
shares of its Series A cumulative preferred stock for $250,000 per share
that would generate maximum proceeds of $3,500,000 if all shares were
sold. During 2000 three shares were sold generating total proceeds of
$750,000. The board has designated the Series A cumulative preferred stock
as having a liquidation preference of $250,000 per share accruing
dividends at the rate of 8% per annum. The Series A cumulative preferred
stock is convertible into common stock at the rate of $.385 per common
share, subject to certain dilution adjustments. At the date of issuance,
the rate at which the preferred stock could be converted into common stock
was below the trading market price of the common stock. For accounting
purposes, this difference has been recorded as an increase in additional
paid-in-capital and a corresponding increase in the deficit accumulated
during the development stage. On July 1, 2001, one shareholder of the
series A cumulative preferred stock elected to convert their share into
common stock. Upon conversion, this shareholder received 661,926 shares of
the Company's common stock. At bankruptcy plan confirmation, the remaining
2 preferred shares convert into 1,890,598 shares of common stock.
In 2000 and 2001, the Company issued 1,389,000 and 3,025,155 shares,
respectively, of its common stock upon conversion of notes payable
outlined in Note 3.
During 2000, the Company issued 105,000 shares of its common stock to
employees for compensation valued at $94,500.
During 2001, the Company issued 542,500 shares of its common stock to
various management consultants for services rendered valued at $574,425.
F-27
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2002
6. Stockholders' equity (continued)
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. At the
time of the merger, the Schulze Corp. owned 20,144,196 shares of the
Company's common stock.
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.
In May 2001, the Company sold 403,999 shares of common stock to a related
party and three other purchasers who qualified as "accredited" investors
under Rule 501 of Regulation D under the Securities Act of 1933, as
amended ("Securities Act") for total proceeds of $303,000. These proceeds
were then used by the Company to reduce notes payable and accrued interest
payable to selected noteholders of the Company outlined in Note 3.
In December 2001, the Company received stock subscriptions for an
additional $175,000 of equity from each of two directors enabling the
Company to begin the marketing of its Budget Saver(TM) program. Under the
term of these agreements, each director will receive 405,093 shares of the
Company's common stock. Additionally, each director shall receive a
royalty equal to one quarter of one cent ($.0025) for each coupon
processed by the Company through the Budget Saver(TM) program. This
royalty payment shall continue until that time when the bid price for the
Company's common stock equals or exceeds $2.00 per share for at least 72
days within a 90 day period, however regardless of the bid price, the
royalty shall remain in place until at least November 30, 2002. The
directors also have the first right of refusal on providing additional
equity to the Company up to an initial $2,250,000 of equity.
At the Company's stockholder meeting on September 29, 2000, the
stockholders approved an amendment to the Company's Articles of
Incorporation to increase the number of shares of $.001 par value common
stock authorized to 150,000,000 shares and increase the number of shares
of preferred stock authorized to 50,000,000 shares.
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 equity proceeds of $1,000,000 in January 2001, $500,000
in April 2001, and the final $552,000 in August 2001 all in exchange for
an aggregate of 6,600,000 shares of
F-28
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2002
6. Stockholders' equity (continued)
common stock. In connection with the release of the final $552,000 from
escrow, the Company issued 7,600,000 options to purchase shares of the
Company's restricted common stock at prices ranging from $.75 per share to
$1.50 per share. Also in connection with the release of the final $552,000
from escrow, the Company issued 660,000 options to purchase shares of the
Company's restricted common stock to In Store Capital, LLC at prices
ranging from $.75 per share to $1.50 per share.
Additionally, in August 2001, in accordance with the agreement to provide
financing contracted upon by the Company and the investor group, the
Company released from escrow 1,000,000 shares of the Company's restricted
common stock in satisfaction of the agreement to provide the Company with
accounts receivable financing. In connection with the financing and
corresponding release of the shares, the Company recorded debt issuance
costs of $390,000 that are being amortized over the three-year term of the
financing agreement.
Sale of Common Stock:
In January 2002, the Company raised $150,000 of additional equity from In
Store Capital, LLC ("ISC") enabling the Company to continue the marketing
of its Budget Saver(TM) program. Under the term of the agreement, ISC is
to receive 347,222 shares of the Company's common stock. Additionally, ISC
shall receive a royalty equal to one half of one cent ($.005) for each
coupon processed by the Company through the Budget Saver(TM) program. This
royalty payment shall continue until that time when ISC shall have
received royalty payments totaling $300,000. The $150,000 proceeds have
been treated as stock subscriptions received.
In September 2002, the Company sold 424,000 shares of common stock to
individuals for proceeds of $34,105 (net of offering costs of $3,789).
In November 2002, an officer of the Company subscribed for and was issued
2,000,000 shares of common stock generating proceeds of $100,000 to the
Company previously recorded as stock subscriptions receivable.
The Company also sold 1,451,146 shares of common stock to an individual
and two directors of the Company for proceeds of $235,000 (including
200,459 shares issued in exchange for the cancellation of a note payable -
see Note 3). 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.
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
F-29
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2002
6. Stockholders' equity (continued)
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. For the year 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.
Common stock issued in exchange for services
During 2002, the Company issued 300,000 shares of common stock in exchange
for services rendered from a consultant and recorded an expense of $12,000
in connection with the transaction.
Stock warrants:
The following is a summary of stock warrant activity:
Exercise Number of
price shares
----------- -----------
Balance at December 31, 2000 8,310,756
Issued in 2001 $2.00 3,150,000
Exchanged in 2001 $.067, $.667 and $1.33 (2,036,195)
Exercised in 2001 $.067 and $.667 (289,645)
Expired in 2001 $.067 to $1.33 (2,741,695)
-----------
Balance at December 31, 2001 6,393,221
Issued in 2002 --
Exchanged in 2002 --
Exercised in 2002 --
Expired in 2002 $1.00 to $1.25 (3,243,221)
----------
Balance at December 31, 2002 $2.00 3,150,000
==========
Exercisable at December 31, 2002 $2.00 --
==========
During 1999, 2000, and 2001 the Company extended the exercise period of
the remaining A, B and C warrants issued in 1996 in connection with the
private placement of promissory notes for an additional 90 to 120 days.
For accounting purposes the Company treated these extensions as stock
appreciation rights and therefore were valued at $959,895 for 1999 and
F-30
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2002
6. Stockholders' equity (continued)
were treated as additional paid-in capital and interest expense. During
2000, although more warrants were extended, the market price of the
Company's stock declined resulting in the reduction of interest expense
and additional paid-in capital of $95,901. During 2001, in connection with
a further extension of these warrants, $474,175 was recorded as an
increase in interest expense and additional paid-in-capital. All such
related warrants that were not exercised during 2001, expired as of
December 31, 2001. Additionally, during 2001 the Company issued 513,039
shares of common stock upon the exercise of certain A, B, and C warrants
resulting in proceeds of $82,597. Through June 2002, the Company recorded
interest expense of $74,108 relating to other warrants at which time these
warrants expired.
In March 2000, the Company signed an agreement with a financial firm whose
principal officer is a director of the Company. This agreement provides
for the firm to assist the Company in obtaining the necessary equipment
financing and revolving credit facility required to implement and rollout
the Company's proprietary electronic coupon clearing system in multiple
retail locations. In association with this agreement, the Company agreed
to issue the firm warrants to purchase 3,150,000 shares of the Company's
restricted common stock at a price of $2.00 per share. These warrants may
not be exercised for two years following the date of issue and expire five
years after the date of issue. Additionally, the Company may call the
warrants any time after two and one-half years from the date of issue and
before the expiration of the warrants at a price of $4.00 per share. These
warrants were issued effective January 19, 2001 in connection with the
$2,052,000 private equity funding arrangement completed in January 2001.
Stock options:
During 1998, the board of directors granted to two employees, options to
purchase up to 2,000,000 shares of the Company's common stock in the
aggregate in exchange for services the Company received during 1998. The
options are exercisable at $1.00 per share and vest upon the attainment of
certain goals. During 1999, the board of directors granted one employee an
option to purchase up to 1,000,000 shares of the Company's common stock
exercisable at $1.00 per share. This option was to vest upon the
attainment of certain goals. No compensation was recorded under these
awards and all except 100,000 of these options have expired unexercised.
During 2000, the board of directors granted to two employees and a
director, also serving as a consultant, options to purchase 536,875 shares
of the Company's common stock at a strike price of $.25 per share. The
board of directors also granted options, to these same three individuals,
to purchase 775,000 shares of the Company's common stock at the lesser of
$1.00 or 85% of the average price of the Company's common stock for the 15
days prior to the date of exercise. These options vest over time and upon
the attainment of certain milestones. During 2000, the Company issued
options to a consultant to purchase in the aggregate 400,000 shares of the
Company's common stock exercisable at $1.00 to $3.00 per share for two
years. For the years ended December 31, 2000 and 2001, the Company
recognized compensation expense of $324,527 and $30,783, respectively,
resulting from the difference between the exercise price and the market
price of the Company's common stock at the time the options were granted.
F-31
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2002
6. Stockholders' equity (continued)
During 2001, the Company also issued options to purchase 650,000 shares of
the Company's common stock to two consultants and valued these shares at
$118,065.
In January 2001, the Company issued to three employees, options to
purchase 730,000 shares of the Company's common stock exercisable at a
price ranging from $.25 to $.30 per share, for a two-year to a five-year
period and are fully vested. In connection with the issuance of these
options, the Company has recorded compensation expense of $261,526.
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 (400,000 options in the aggregate). These shares may be
exercised by a full recourse note payable by each director. This
resolution was ratified by the Company's shareholders at the 2001 Annual
Shareholders' Meeting held in October 2001. The Company recorded
compensation expense of $20,000 in connection with the grant of these
options.
On December 31, 2001, Donald P. Uhl resigned as Chairman, President, and
Chief Executive Officer of the Company. Mr. Uhl was succeeded by Michael
T. Mozer, the Company's Vice Chairman, on January 1, 2002. In February
2002 and in conjunction with the hiring of Mr. Mozer, 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 2002, in connection with a secured loan, the Company recorded a
debt issuance cost and additional paid in capital of $30,000 based on the
Black-Scholes model for options issued in connection with the loan.
During 2002, the Company issued options to a consultant to purchase
250,000 shares of the Company's common stock exercisable at prices ranging
from $.12 to $.41 per share.
For the year ended December 31, 2002, the Company recognized compensation
expense of $12,600 and $45,180 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.
2000 Omnibus Equity Incentive Plan:
On October 24, 2001, the Company's stockholders approved the 2000 Omnibus
Equity Incentive Plan which reserved for issuance 6,000,000 shares of the
Company's common stock. The Plan also contains a provision to increase
annually the number of shares available for issuance by the lesser of
10,000,000 shares or 10% of the outstanding shares of common stock of the
F-32
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2002
6. Stockholders' equity (continued)
Company. Under the terms of the Plan, the Company can issue incentive
stock options (ISO's) and non-qualified stock options (NSO's). For ISO's,
the purchase price of the shares granted will not be less than the
estimated fair market value at the date of grant unless the purchaser owns
more than 10% of the total combined voting power of all classes of stock
on the date of grant, in which case the purchase price shall not be less
than 110% of the estimated fair market value at the date of grant. Options
granted are exercisable for five years from the date of the grant for
stockholders owning more than 10% of the total combined voting power of
the Company's stock. Options granted to other employees are exercisable
for ten years from the date of grant. The Plan contains provision that
permit the granting of stock appreciation rights by the committee that
administers the Plan. The rights may be exercised by surrendering the
option and receiving an amount equal to the difference in the fair market
value of the shares on the date of surrender and the option price of such
shares.
Registration of company equity incentive plan:
In February 2002, the Company completed an S-8 Registration with the
Securities and Exchange Commission registering 8,866,875 options to
purchase shares of the Company's common stock that were authorized to be
issued under the Company's 2000 Omnibus Equity Incentive Plan. As of
December 31, 2002, options representing 3,066,875 shares of common stock
had been granted to various employees and directors of the Company.
Additionally, as of December 31, 2002, no such options were exercised.
The following is a summary of stock option activity:
Option price Weighted average Number
per share exercise price of shares
------------------ ---------------- ----------------
Balance December 31, 2000 $ 0.25 to $ 3.00 $ 0.85 3,386,875
Granted $ 0.21 to $ 1.50 $ 0.98 10,040,000
Exercised $ -- $ -- --
Forfeited $ 0.50 to $ 1.00 $ 0.94 (1,150,000)
------------------ ----------------
Balance December 31, 2001 $ 0.21 to $ 3.00 $ 0.93 12,276,875
Granted $ 0.012 to $ .44 $ 0.26 3,907,769
Exercised $ -- $ -- --
Forfeited $ 0. 25 to $ 3.00 $ 0.51 (3,919,644)
------------------ ----------------
Balance December 21, 2002 $ 0.01 to $ 1.50 $ 0.86 12,265,000
================== ================
Options exercisable at December 31, 2002 $ 0.01 to $ 1.50 $ 0.86 12,265,000
================== ================
F-33
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2002
6. Stockholders' equity (continued)
The following is additional information with respect to those options and
warrants outstanding at December 31, 2002:
Weighted Weighted
average remaining average
Price per contractual life exercise Number of
share in years price shares
----- -------- ----- ------
Options $0.01 0.47 $0.01 1,000,000
$0.12 1.71 $0.12 50,000
$0.21 to $0.30 2.13 $0.27 1,480,000
$0.36 to $0.50 2.94 $0.44 800,000
$0.67 to $1.00 1.47 $0.85 4,805,000
$1.25 to $1.50 1.64 $1.38 4,130,000
-----------
12,265,000
==========
Warrants $2.00 3.0 $2.00 3,150,000
==========
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. Accordingly, no compensation cost has been recognized for
the stock option plans unless the grant date fair value of the underlying
common stock exceeded the exercise price of the option. Had compensation
costs for the Company's stock option plans been determined based on the
fair value at the grant date for awards during the years ended December
31, 2001 and 2002 in accordance with the provisions of SFAS No. 123, the
Company's net loss and loss per share would have been reduced to the pro
forma amounts indicated below:
2001 2002
------------- -------------
Net loss - as reported $ (4,653,268) $ (2,321,512)
Net loss - pro forma (4,860,678) (2,386,321)
Loss per share - as reported (0.07) (0.03)
Loss per share - pro forma (0.07) (0.03)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 2001 and 2002, dividend
yield of 0%; expected volatility of 100%, risk-free interest rate of 3.07%
to 6.54% (2001) and 5.48% (2002); and expected life of 1.5 to 4 years
(2001) and 10 years (2002).
F-34
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2002
7. Basic and diluted warrants net loss per share
Basic net loss per share is based on the weighted average number of shares
outstanding during the periods. Shares issued for nominal consideration
are considered outstanding since inception. Diluted loss per share has not
been presented as exercise of the outstanding stock options and warrants
would have an anti-dilutive effect.
8. Commitments and contingencies
Unisys:
In 1997, the Company entered into a long-term, limited joint venture
contract with Unisys Corporation (Unisys) in which Unisys will provide at
its cost, most of the hardware, middleware, software and depot level
maintenance for the Company's Coupon Exchange Center (CEC) system. Unisys
will initially provide these services and build seven Coupon Exchange
Centers for $1,901,000. Unisys will manufacture CEC's thereafter for a
price to be determined by volume along with certain minimum annual fees to
be paid by a royalty on each CEC In$taCa$h coupon redeemed. The Company
has paid Unisys $943,716 and has recorded a payable of $498,407 at
December 31, 2002. The Company will owe an estimated $1,100,000 upon
delivery of product. Certain of the amounts in excess of agreed upon
expenditure ceilings are subject to negotiation and may affect the future
amounts owed. This debt was discharged as a result of the bankruptcy
proceedings (See Note 12).
Operating lease commitments:
The Company leases office space under an operating lease on a
month-to-month basis. Additionally, the Company leases certain office
equipment under operating lease agreements. Total rent expense for the
years ended December 31, 2001 and 2002 was $38,540 and $31,813,
respectively.
Capital lease commitments:
The Company leases certain equipment under capital leases. On March 18,
1998, a major shareholder of the Company assumed the $247,880 remaining
balance on certain capital leases and the deposit received of $27,880 by
issuing to the lessor 929,552 shares of the Company's restricted common
stock owned by the shareholder.
On November 24, 1999, an agreement was formalized whereby the Company
issued a convertible debenture in settlement of the capital lease
obligation to the major shareholder. During 2000, the Company settled its
obligation under the debenture of $380,050 (principal and accrual
interest) by the payment of $126,000 in cash and applying the deposit held
of $27,880 resulting in a benefit to the company of $226,170 which is
reflected as contributed capital.
F-35
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2002
9. Financial instruments
The fair value of pre-petition liabilities is negligible due to the
pending bankruptcy.
10. Restructuring charges
In December of 2000, the board of directors changed the focus of the
business from constructing their own equipment for coupon clearing to
contracting this out to third parties. The Company sold manufacturing
equipment with the book value of $155,703 for $125,000 resulting in a loss
of $30,703. The Company also wrote down its inventories of parts by
$96,200 and wrote off the note receivable from a director of the Company
and two of his relatives as consideration for abandoning the asset
purchase agreement. The above changes have been reflected on the statement
of operations as restructuring charges of $196,511. During 2001, the
Company abandoned additional equipment with a book value of $26,121.
11. Reorganization expense
The Company has recorded certain legal expenses as reorganization expenses
under its Chapter 11 bankruptcy filing. Such treatment is consistent with
Statement of Position 90-7 as issued by the Accounting Standards Executive
Committee in November 1990.
12. Subsequent events
New Chairman, President and Chief Executive Officer:
During February 2003, Michael T. Mozer resigned as Chairman, President,
and Chief Executive Officer of the Company. Donald P. Uhl, the Company's
previous Chairman, President and Chief Executive Officer succeeded Mr.
Mozer.
During May and June 2003, the Company entered into negotiations with
Acclaim Financial Group Ventures II, LLC ("AFGVII") wherein subject to
Bankruptcy Court approval, AFGVII would provide financing to the Company.
Between February and June 2003, the Company received a net of $12,350 in
short-term loans from an officer and director of the Company which funds
were used to support Company activity.
In June of 2003, the Company discharged the liability it had recorded to
Unisys Corporation for $498,407 as a result of the Restructuring
Proceedings.
On July 15, 2003, in connection with the Restructuring Proceedings, the
Court approved the Company entering into debtor-in-possession credit
facility (the "DIP Facility") with AFGVII to supplement liquidity and fund
operations during the Restructuring Proceedings, and potentially beyond
such period. Under the DIP Facility, a creditor, Melissa McBride, was
required to subordinate its claims to any claims of AFGVII arising under
the DIP Facility. NMPP subsequently purchased the claim of Melissa
McBride. Among other terms, the DIP Facility contemplates: (i) AFGVII
receiving a priority security interest in all the assets of the Debtor
F-36
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2002
12. Subsequent events (continued)
subject to minimal exceptions for professional and trustee fees incurred
by the Debtor and approved by the Court); (ii) initial borrowings of up to
$200,000, with a maximum borrowing of up to $3.0 million upon Court
approval of a plan of reorganization acceptable to AFGVII; (iii) an
interest rate of 2% per month on all obligations deemed outstanding under
the DIP Facility; (iv) AFGVII being reimbursed (or such amounts being
added to amounts deemed outstanding) for all expenses incurred in
connection with the DIP Facility; (v) maturity of the DIP Facility on the
earlier to occur of certain specified events or December 31, 2003; (vi)
AFGVII being granted an option to acquire 20% of the fully diluted equity
of the Debtor at various prices; and (vii) the Debtor's compliance with
various affirmative and negative covenants that restrict the operations
and ability of the Debtor to engage in various transactions.
The Company's available borrowings and use of borrowings under the DIP
Facility are restricted in many ways, including the Debtor using any
borrowings in a manner acceptable to AFGVII as set forth in a budget
prepared by the Debtor and approved by AFGVII.
On July 15, 2003, the Company took appropriate corporate action to cause
two representatives of AFGVII to be appointed to the Company's Board of
Directors (which now consists of four members) and an individual
designated by AFGVII assumed the role of Chairman, CEO, Secretary and
Treasurer of the Company.
In August 2003 as part of the Company's strategy to devote its financial
resources primarily to pursuing its litigation strategy in an effort to
maximize recovery, the Company closed its Aurora, Colorado location. The
Company continues to be supported by contract staff and by management
personnel located out of state.
As part of management's decision to close the office, certain accounting
adjustments were recorded in August 2003 to reflect the disposition of the
Company's furniture and fixtures along with certain obsolete demonstration
equipment and other inventory to the Company's landlord in exchange for
the extinguishment of certain rent obligations which had accrued.
On December 31, 2003, AFGVII agreed to waive an event of default under the
DIP Facility (related to the Debtor's failure to pay amounts due under the
DIP Facility by such date and the Debtor's failure to have an acceptable
plan of reorganization approved by the Court), for a period of time to be
solely determined by AFGVII, with AFGVII reserving the right to declare an
event of default upon one business day notice to the Debtor. Upon the
effective date of a final and non-appealable plan of reorganization
acceptable to AFGVII (an "Approved Plan"), the Company and AFGVII have
agreed to amend the DIP Facility such that, among other things, (i) AFGVII
will have a continuing first priority security interest in all of the
assets of the Company and (ii) the interest rate on all new borrowings
will be 7% per annum.
F-37
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2002
12. Subsequent events (continued)
The LGS Litigation was initiated in the Bankruptcy Court after LGS filed
suit in the United States District Court for the Southern District of
Georgia (the "Georgia Action") alleging the Company had breached a patent
software license agreement. As a result of the initiation of the
Restructuring Proceedings, the Georgia Action was stayed. After
negotiations among representatives of the Debtor and LGS, on March 29,
2004, the Debtor and LGS (and certain affiliated parties) (the "LGS
Parties") entered into a settlement agreement (the "LGS Settlement
Agreement"), which was approved by the Court on April 29, 2004. Under the
terms of the LGS Settlement Agreement, LGS paid to the Debtor a total of
$60,000 in cash, all adversary proceedings (including the Georgia Action
and the LGS Litigation) were dismissed, all claims held by the LGS Parties
were assigned to the Debtor and the Debtor and the LGS Parties entered in
mutual releases.
On November 12, 2004, a Plan of Reorganization (the "Plan") for the
Company was filed with the Bankruptcy Court. The Plan was jointly proposed
by the Company and AFGVII (collectively referred to as the "Plan
Proponents"). Also on November 16, 2004, a Disclosure Statement to be used
in soliciting votes to accept or reject the Plan (the "Disclosure
Statement") was approved by the Bankruptcy Court and a hearing to
determine whether the Bankruptcy Court should approve the Plan was set for
January 20, 2005.
On December 8, 2004, solicitation packages containing the Plan and
Disclosure Statement, various supporting documents and a ballot, if
appropriate, were mailed to known creditors of the Company and holders of
common and preferred stock interests in the Company. Unless extended by
the Plan Proponents or the Bankruptcy Court, all votes to accept or reject
the Plan must be returned by the close of business on January 20, 2005.
Under the Plan, various claim holders and interest holders will be
entitled to receive various consideration in respect of their claims and
interests. The Plan classifies the claim and interest holders into various
groups that have been approved by the Court as follows:
Unclassified --Administrative Claims: These claims in an
amount of approximately $292,000 constituted claims allowed under
ss.11 U.S.C. ss.503(b) of the Code and constituted primarily claims
of counsel to the Company for fees and expenses incurred
post-petition on behalf of the Company. Such claims will be paid in
full in cash or pursuant to other arrangement acceptable to such
claim holders (such amounts to be provided by AFGVII under the DIP
Facility).
Class 1--Secured Claim of NMPP: This claim of $100,000 plus
accrued interest constituted the sole claim held by NMPP, Inc. (an
affiliate of AFGVII) representing secured indebtedness incurred by
the Company prior to the Petition Date. This claim was converted
with the Class 2 claim into a pro rata share of 3,000,000 shares of
the Common Stock in the reorganized Company to be issued under the
Plan (the "Replacement Common Stock").
Class 2--Secured Claim of AFGVII: This claim of $250,000 plus
accrued interest constituted the sole claim held by AFGVII
representing secured indebtedness incurred by the Company under the
DIP Facility prior to the effective date of the Plan. Such claim was
converted with the Class 1 claim into a pro rata share of 3,000,000
shares of the Replacement Common Stock.
F-38
AFG ENTERPRISES, INC.
(FORMERLY IN STORE MEDIA SYSTEMS, INC. - DEBTOR-IN-POSSESSION)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2002
12. Subsequent events (continued):
Class 3--Allowed Unsecured Claims in Excess of $1,000: These claims
constituted allowed unsecured claims held by various claimants
incurred prior to the Petition Date who have not elected to be
treated as Class 4 Claims. These claims equaled approximately
$1,900,000. Such claims were converted into their pro rata share of
1,500,000 shares of the Replacement Common Stock.
Class 4--Allowed Unsecured Claims of $1,000 or less: These claims in
an amount of approximately $10,000 will be paid in full in cash or
pursuant to other arrangement acceptable to such claim holders (such
amounts to be provided by AFGVII under the DIP Facility).
Class 5--Allowed Administrative Convenience Claims: These claims
constitute claims allowed under ss.11 U.S.C. ss.503(b) of the Code,
the holder of which elect to receive an amount not in excess of
$1,000 in cash in respect of their claims. No creditors elected
treatment under this Class.
Class 6--Interests: This Class constitutes any equity interest
in the Company including Common Stock, preferred stock, options,
warrants, convertible instruments and other equity equivalents but
excluding the options granted to AFGVII in connection with the DIP
Facility. There are currently 78,751,406 shares (net of 9,374,742
treasury shares) of Common Stock outstanding, 2 shares of Preferred
Stock outstanding (convertible into 1,890,598 shares of Common
Stock) and 19,282,809 options and other equity equivalents
outstanding. All shares of Common Stock and preferred stock will be
reverse split into 500,000 shares of the Replacement Common Stock.
The number of shares subject to AFGVII's option to purchase Common
Stock will be adjusted to reflect the stock split. The exercise
price per share is not subject to adjustment and will remain at
various prices ranging from $0.001 to $0.03.
The Bankruptcy Court may confirm a plan of reorganization only upon making
certain findings required by the Bankruptcy Code, and a plan may be
confirmed over the dissent of non-accepting creditors and equity security
holders if certain requirements of the Bankruptcy Code are met. The
payment rights and other entitlements of pre-petition creditors and equity
security holders may be substantially altered by any plan of
reorganization confirmed in the Chapter 11 Case.
On January 20, 2005, the Bankruptcy Court confirmed and approved the Plan.
On January 31, 2005 all appeal periods with respect to the Bankruptcy
Court confirmation and approval of the Plan expired.
As a result of its direct stock ownership and indirectly through
affiliated companies, AFGV II will control approximately 63.7% of the
stock in the reorganized debtor.
F-39
Exhibit 21.1
List of Subsidiaries
Company Name State of Incorporation
The E. Schulze Corporation Colorado (administratively dissolved July
2003)
Data Driven Marketing, Inc. Colorado
Exhibit 31.1
Certification of Principal Executive Officer
Pursuant to pursuant to Rule 13a-14(a) or Rule 15d-14(a)
of the Securities Exchange Act of 1934, as amended
I, Erich Spangenberg, Chief Executive Officer of AFG Enterprises, Inc.
(the "Company"), certify that:
1. I have reviewed this annual report on Form 10-KSB of the Company;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. As the registrant's certifying officer, I am responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and I have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under my supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the period covered by this
report that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting.
5. As the registrant's certifying officer, I have disclosed, based on my
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: April 15, 2005 /s/Erich Spangenberg
----------------------------
Erich Spangenberg,
Chief Executive Officer
Exhibit 31.2
Certification of Principal Accounting Officer
Pursuant to pursuant to Rule 13a-14(a) or Rule 15d-14(a)
of the Securities Exchange Act of 1934, as amended
I, William P. Stelt, Chief Financial Officer of AFG Enterprises, Inc. (the
"Company"), certify that:
1. I have reviewed this annual report on Form 10-KSB of the Company;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. As the registrant's certifying officer, I am responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and I have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under my supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the period covered by this
report that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting.
5. As the registrant's certifying officer, I have disclosed, based on my
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: April 15, 2005 /s/William P. Stelt
-------------------
William P. Stelt,
Chief Financial Officer
Exhibit 32
CERTIFICATIONS
OF CEO AND CFO
PURSUANT TO18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of AFG Enterprises, Inc. (the
"Company") on Form 10-KSB for the period ending December 31, 2002 as filed with
the Securities and Exchange Commission (the "Report"), Erich Spangenberg, as
Chief Executive Officer of the Company, and William P. Stelt, as Chief Financial
Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
to the best of his knowledge:
(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 results of operations of the
Company.
April 15, 2005
By: /s/ Erich Spangenberg
---------------------
Erich Spangenberg, CEO
By: /s/ William P. Stelt
--------------------
William P. Stelt, CFO
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