UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2002
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _________________ to
Commission file number 001-15363
AdStar, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware 22-3666899
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
4553 Glencoe Avenue, Suite 325, Marina del Rey, California 90292
(Address of principal executive offices)
(310) 577-8255
(Issuer's telephone number)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of November 12, 2002 the Issuer
had outstanding 8,258,214 shares of its common stock, including 4,956 shares
issuable pursuant to the vendor compensation plan.
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|
Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|
TABLE OF CONTENTS
FORM 10-QSB REPORT
September 30, 2002
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Interim condensed financial statements
(unaudited)
Balance Sheet - September 30, 2002 3
Statements of Operations
For the three month and nine month periods
Ended September 30, 2001 and 2002 4
Statements of Cash Flows
For the nine month periods ended
September 30, 2001 and 2002 5
Notes to interim financial statements 6
Item 2. Management's discussion and analysis or plan of operation 12
Item 3. Evaluation Of Disclosure Controls And Procedures 19
PART II - OTHER INFORMATION
Item 2. Changes in securities and use of Proceeds 19
Item 6. Exhibits and reports on form 8-K 20
SIGNATURES 21
2
AdStar, Inc.
Balance Sheet
September 30, 2002 (unaudited)
Assets
Current assets:
Cash and cash equivalents $ 385,032
Restricted cash 174,918
Accounts receivable, net of allowance of $42,547 222,052
Notes receivable from officers - current portion 7,081
Prepaid and other current assets 152,187
------------
Total current assets 941,270
Notes receivable from officers, net of current portion 241,777
Property and equipment, net 2,126,202
Deferred contract costs, net 439,648
Intangible assets, net 57,243
Other assets 31,196
------------
Total assets $ 3,837,336
============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 810,654
Accrued expenses 254,573
Deferred revenue 161,481
Capital lease obligations - current portion 28,904
Total current liabilities 1,255,612
------------
Capital lease obligations, net of current portion 56,103
------------
Total liabilities 1,311,715
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $0.0001; authorized 5,000,000 shares; 1,443,457
shares issued and outstanding; liquidation preference of $1,894,000 144
Common stock, par value $0.0001; authorized 20,000,000 shares;
8,256,870 shares issued and outstanding 826
Additional paid-in capital 12,741,232
Treasury stock, par value $0.0001; 67,796 shares (7)
Accumulated deficit (10,216,574)
------------
Total stockholders' equity 2,525,621
------------
Total liabilities and stockholders' equity $ 3,837,336
============
The accompanying notes are an integral part of these
interim financial statements.
3
AdStar, Inc.
Statements of Operations
For the three month and nine month periods
ended September 30, 2001 and 2002 (unaudited)
Three months ended Nine months ended
September 30, September 30,
---------------------------- ----------------------------
2001 2002 2001 2002
----------- ----------- ----------- -----------
Revenues $ 640,462 $ 654,769 $ 1,612,257 $ 1,696,614
Cost of revenues 205,113 290,034 576,761 776,156
----------- ----------- ----------- -----------
Gross profit 435,349 364,735 1,035,496 920,458
Selling expenses 174,056 130,540 511,984 435,031
Administrative expenses 411,991 465,314 1,433,661 1,395,793
Development expenses 98,175 110,192 392,025 416,627
----------- ----------- ----------- -----------
Loss from operations (248,873) (341,311) (1,302,174) (1,326,993)
Other income -- -- -- 62,796
Interest income, net 7,173 2,762 26,138 13,248
----------- ----------- ----------- -----------
Loss before taxes (241,700) (338,549) (1,276,036) (1,250,949)
Provision for income taxes 1,489 1,566 3,539 5,195
----------- ----------- ----------- -----------
Net loss $ (243,189) $ (340,115) $(1,279,575) $(1,256,144)
=========== =========== =========== ===========
Loss per share - basic and diluted $ (0.04) $ (0.04) $ (0.20) $ (0.15)
Weighted average number of shares -
basic and diluted 6,654,985 8,186,778 6,254,378 8,176,097
The accompanying notes are an integral part of these
interim financial statements.
4
AdStar, Inc.
Statements of Cash Flows
For the nine month periods
Ended September 30, 2001 and 2002 (unaudited)
2001 2002
----------- -----------
Cash flows from operating activities:
Net loss $(1,279,575) $(1,256,144)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation and amortization 237,238 434,283
Stock returned from settlement -- (67,789)
Stock based charges 66,909 28,552
Allowance for doubtful accounts -- 27,547
Loss on disposal of fixed assets 20,814 --
Changes in assets and liabilities:
Accounts receivable (142,083) (39,229)
Prepaid and other assets 93,483 15,869
Deferred contract costs -- (454,648)
Accounts payable 65,264 456,388
Accrued expenses (227,073) (192,055)
Deferred revenue 147,164 8,268
----------- -----------
Net cash used in operating activities (1,017,859) (1,038,958)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (653,935) (598,114)
Proceeds from disposal of fixed assets 26,661 --
Notes from officers -- (210,434)
Repayment of officer receivable 6,750 4,696
----------- -----------
Net cash used in investing activities (620,524) (803,852)
----------- -----------
Cash flows from financing activities:
Restricted cash 89,480 (129,461)
Proceeds from leasing of property and equipment -- 79,751
Net proceeds from sale of common stock 365,214 151,552
Net proceeds from sale of preferred stock -- 1,722,840
Principal repayments on capital leases (45,773) (8,379)
----------- -----------
Net cash provided by financing activities 408,921 1,816,303
----------- -----------
Net decrease in cash and cash equivalents (1,229,462) (26,507)
Cash and cash equivalents at beginning of period 1,606,999 411,539
----------- -----------
Cash and cash equivalents at end of period $ 377,537 $ 385,032
=========== ===========
Supplemental cash flow disclosure:
Taxes paid $ 4,565 $ 9,682
Interest paid $ 2,645 $ 4,825
Non cash investing and financing activities
Conversion of note payable and accrued interest to
common stock $ 1,186,966 $ --
Conversion of accounts payable to common stock $ -- $ 62,469
The accompanying notes are an integral part of these
interim financial statements.
5
AdStar, Inc.
Notes To Interim Financial Statements
(Unaudited)
1. General
The interim financial statements for AdStar, Inc. (the "Company") have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with instructions to Form 10-QSB and
Item 10 of Regulation S-B. Accordingly they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three-month period ended September 30, 2002 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2002. These financial statements should be read in
conjunction with the financial statements and notes thereto included in
the Company's Annual Report on Form 10-KSB/A for the year ended December
31, 2001.
For the nine-month period ended September 30, 2002, the Company had
incurred a cash outflow from operations of approximately $1,039,000 and as
of September 30, 2002, the Company had negative working capital of
$(314,342). Based on the Company's current operating plans, management
believes existing cash resources, cash forecasted by management to be
generated by operations and anticipated gross proceeds of $1,500,000 from
the contemplated sale of preferred stock during the fourth quarter 2002
and first quarter 2003 will be sufficient to meet working capital and
capital requirements through September 30, 2003 (see Note 9 of the notes
to interim financial statements). Also, management's plans to attain
profitability and generate additional cash flows include expansion of
services under existing and new contracts, while containing any increase
to operating expenditures necessary to accommodate this expansion,
including a reduction in staffing levels after completion of existing and
contemplated development contracts entered into or expected to be entered
into in association with the contemplated sale of preferred stock,
expected to be substantially completed by May 2003. There is no assurance
that management will be successful with these plans. However, if events
and circumstances occur such that the Company does not meet its current
operating plan as expected, and the Company is unable to raise additional
financing, the Company may be required to further reduce certain
discretionary spending, which could have a material adverse effect on the
Company's ability to achieve its intended business objectives.
2. Summary of Significant Accounting Policies
Concentration of Credit Risk and Major Customers
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts
receivable. Also, at times, cash balances held in financial institutions
are in excess of FDIC insurance limits.
For the three months ended September 30, 2002 and 2001, no customer
accounted for 10% of the Company's revenues. At September 30, 2002, eight
customers in the aggregate accounted for 73% of the Company's accounts
receivable. The majority of the
6
Company's customers have historically consisted of newspapers and
publishers of classified advertisements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
The Company derives revenue from several products and services as follows:
Technology services revenue - The Company receives revenue from technology
service contracts that generally contain multiple elements such as
software customization services, monthly fees and post-contract customer
support (PCS). Revenue from these arrangements is recognized in accordance
with Statement of Position ("SOP") 97-2, "Software Revenue Recognition",
and SOP 98-9, "Software Revenue Recognition with Respect to Certain
Transactions". Accordingly, revenue is allocated to each element within
the contract based on the relative fair values of those elements using
vendor specific objective evidence. Revenue from monthly fees and PCS
under software maintenance arrangements is based upon renewal rates and is
recognized ratably over the term of the arrangement. Revenue from software
customization services is recognized as the services are performed, using
a percentage of completion methodology based on labor hours. The Company
also provides customization services at the customers' request and
recognizes revenue as the services are performed, using a percentage of
completion methodology based on labor hours.
Areas requiring management's judgment include revenue recognition and cost
estimation on the fixed fee software customization element of the
contracts. Revenue is recognized on these contracts using a
percentage-of-completion methodology, based upon labor input measures and
an estimate of time to completion. Monthly, technical management reviews
the estimate of labor hours required to complete the customization and the
effect of any change in estimate is reflected in the period in which the
change is first known. Such changes in estimates have not been material to
our quarterly results of operations. The corresponding cost of revenue
charge is derived based upon the same labor input measurements and our
existing cost structure. If the Company does not accurately estimate the
resources required under the contract or the scope of the work to be
performed, or if the Company does not manage its projects properly within
the prescribed timeframe, future margins may be significantly and
adversely affected. If increases in projected costs-to-complete are
sufficient to create a loss contract, the entire estimated loss is charged
to operations in the period the loss first becomes known. The complexity
of the estimation process and uncertainties inherent in software
customization activities may affect the percentages derived under the
percentage-of-completion accounting method, which in turn may affect the
amounts reported in the financial statements.
ASP revenue - The Company receives revenue from providing an application
service
7
provider ("ASP") product that allows customers to use the Company's
software applications on a "shared system" over the Internet. This
technology is a publisher-specific ad-taking Web site service that offers
visitors to a newspaper's Web page the opportunity to buy classified ads,
for both the print and/or on-line editions of the newspaper, in real-time,
on a 24/7 basis. The Company receives monthly fees for hosting the
transactions and providing customer support, and recognizes the fees
ratably over the contract period.
Web site revenue - The Company receives revenue from fees charged to
customers who transact business on the Advertise123.com Web site. This
site permits the general public to plan, schedule, compose and purchase
advertising from many print and on-line publishers. Under the guidance
provided by the Securities Exchange Commission Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition" and the Emerging Issues Task Force
("EITF") Abstract No. 99-19 "Reporting Revenue Gross as a Principal versus
Net as an Agent" ("EITF 99-19"), the Company is, in substance, acting as
an agent for the publishers and therefore recognizes, as revenue, only the
net fees realized on the transactions. The Company recognizes revenues on
a per-transaction basis when the ad is placed through their system and
collection from the customer is probable.
Development Costs
Costs incurred in the development of products are expensed as incurred,
except for certain software development costs, which are capitalized.
Computation of Earnings Per Share
Basic earnings (loss) per share is computed by dividing the net income
(loss) by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings (loss) per share is
computed by dividing the net income (loss) by the weighted average number
of common shares outstanding plus the number of additional common shares
that would have been outstanding if all dilutive potential common shares
had been issued. Potential common shares are excluded from the computation
when their effect is antidilutive. For the three months ended September
30, 2001 and 2002, diluted loss per share does not include 2,472,453 and
3,434,976, respectively, of options and warrants to purchase common stock
and 0 and 1,443,457, respectively, of shares issuable upon the conversion
of Series A preferred stock to common stock, as their inclusion would be
antidilutive.
3. Significant Contracts
On March 18, 2002, the Company entered into a series of agreements with
Tribune Company ("Tribune"). In accordance with these agreements, the
Company sold 1,443,457 shares of Series A convertible preferred stock to
Tribune Company for approximately $1.8 million. The Company has recorded
the $1.8 million investment in the Series A convertible preferred stock at
cost which approximated fair value. The rights and preferences of the
Series A preferred stock are described in Note 4 below. Additionally, the
Company agreed to develop and customize a version of its Web software
applications to Tribune specifications in exchange for earning
volume-based transaction fees in the future by providing Web-based
recruitment ad sales technology to all major market Tribune newspapers and
on-line services. This customization will
8
provide a platform that allows Tribune owned newspapers, together with
CareerBuilder, L.L.C. (www.careerbuilder.com), to receive recruitment
advertising from agencies, corporate customers, and the general public. On
completion of the development and customization effort, the Company will
manage the related transactions and receive a volume-based ASP fee with a
guaranteed monthly minimum. Costs incurred in the customization effort,
are reflected as deferred contract costs in the balance sheet.
Through September 30, 2002, $454,648 in development and customization
costs have been deferred. During August 2002 the Company launched the
FlexAds(R) service on two Tribune newspapers and commenced amortization of
the cost of the development and customization effort over the expected 5
year period of the agreement. Under the agreement the Company will receive
minimum monthly payments totaling $450,000. The Company commenced
recognition of revenue from the $7,500 minimum monthly fee under the
agreement on a straight-line basis during August 2002. To the extent that
transaction based fees exceed the monthly minimum payments, the Company
will record the excess in revenue when earned. The transactions did not
exceed the contracted minimums for the three months ended September 30,
2002.
4. Series A Convertible Preferred Stock
The Company has authorized 5,000,000 shares of preferred stock, par value
$0.0001 per share, of which 1,443,457 shares have been designated as
Series A convertible preferred stock ("Series A preferred stock"). The
remaining authorized shares have not been designated. At September 30,
2002, the Company has reserved 1,443,457 shares of common stock for
issuance upon the conversion of the Series A preferred stock. The Series A
preferred stock has the following characteristics:
Voting Rights - Each holder of the Series A preferred stock is entitled to
the number of votes equal to the number of shares of common stock into
which such holder's shares are convertible. The Company cannot amend its
certificate of incorporation amending the rights of the Series A preferred
stockholders, enter into any capital stock or equity agreements with
rights ranking the same or above the rights of the Series A preferred
stock or liquidate the Company without the approval of at least a majority
of the holders of the Series A preferred stock then outstanding.
Liquidation Preference - In the event of any liquidation, dissolution or
winding up of the affairs of the Company, the holders of the Series A
preferred stock will be entitled to receive in preference to the holders
of the common stock, an amount per share equal to $1.244 plus accrued and
unpaid dividends. After such payment, the Series A preferred stockholders
share equally with the common stockholders in any remaining assets or
funds of the Company.
Conversion - Each share of the Series A preferred stock is convertible at
anytime at the option of the holder into shares of common stock pursuant
to a ratio of one share of common stock for each share of Series A
preferred stock, subject to certain stock split and stock dividend
adjustments. In addition, the conversion ratio is subject to adjustment,
as defined in the agreement, in the event that the Company issues common
stock at a per share price less than $1.244 per share. All Series A
preferred stock will automatically convert to common stock on the first
day after March 18, 2004 for which the market price of the Company's
common stock exceeds $2.25 per share.
9
Dividends - Dividends on the Series A preferred stock shall accrue at 7%
per annum through the date of liquidation or conversion. In the event of
conversion all accrued and unpaid dividends will be waived.
5. Issuance of Common Stock
In January 2002, the Company sold an additional 300,000 shares of common
stock at a price of $0.50 per share. These shares were sold as part of a
1,300,000 share private placement made pursuant to Sections 4(2) and 4(6)
of the Act, of which 1,000,000 shares were sold prior to December 31,
2001. In connection with this offering the Company issued warrants to
purchase 130,000 shares of its common stock, at a per share price of
$0.75, as part of the placement agent fees. The warrants expire on January
16, 2007.
In January 2002, the Company issued 114,545 shares of common stock in full
settlement of a $62,500 liability, payable to Morse, Zelnick, Rose &
Lander, LLP.
In February 2002, AdStar sold 100,000 shares of its common stock at $0.50
per share. In connection with this sale, the Company issued warrants to
purchase 10,000 shares of its common stock, at a per share price of $0.75,
as part of the placement agent fees. The warrants expire on January 31,
2007.
6. Settlement and return of Common Stock
In November 2000, AdStar entered in a one-year strategic alliance
agreement with Eastman Kodak Company (Kodak) whereby AdStar issued 67,796
shares of its common stock valued at $100,000. As of December 2001 the
parties had not been able to complete the provisions of the agreement to
both parties' satisfaction, whereby Kodak notified AdStar of its intention
to terminate the agreement as of February 28, 2002. After protracted
settlement discussions the parties agreed to a mutual termination and
release agreement entered into during May 2002. As part of the agreement
Kodak returned AdStar's common stock, valued at $67,789 and AdStar agreed
not to pursue any further actions for performance against Kodak.
7. Officers employment agreements and notes receivable
In July 2002, AdStar entered into four-year employment agreements with
each of Leslie Bernhard and Eli Rousso. Their prior agreements expired on
September 30, 2002. Pursuant to her employment agreement, Leslie Bernhard
was retained as President and Chief Executive Officer, and her total
annual compensation was reduced to $212,800. Pursuant to his employment
agreement, Eli Rousso was retained as Executive Vice President and Chief
Technical Officer, and his total annual compensation was reduced to
$212,800. Each agreement provides, among other things, for participation
in an equitable manner in any profit sharing or retirement, separation and
disability plans for employees or executives and for participation in
other employee benefits applicable to employees and executives of AdStar.
Each agreement further provides for fringe benefits which are commensurate
with the executive's duties and responsibilities. Under each agreement,
employment may be terminated by AdStar with cause or by the executive with
good reason. Termination without cause, or by the executive for good
reason, would subject AdStar to liability for liquidated damages in an
amount equal to the terminated executive's base salary for the remaining
term of his or her employment agreement or 12 months, whichever is
greater.
10
In July 2002, AdStar entered into a loan transaction with Leslie Bernhard,
President and Chief Executive Officer and Eli Rousso, Executive Vice
President and Chief Technical Officer for $110,434 and $100,000,
respectively. As part of the transaction, Ms. Bernhard and Mr. Rousso each
issued to AdStar an unsecured, non-negotiable promissory note bearing
interest at 5.56% with monthly principal and interest payments of $763 and
$691, respectively, payable on a monthly basis, with all remaining
outstanding principal and interest amounts due on July 31, 2022.
Concurrently, an outstanding note from Ms. Bernhard in the amount of
$39,566 was restructured under the same terms and conditions as the
aforementioned new note. The loans are forgiven if there is a change in
control in AdStar or if the loan holder is dismissed for other than cause
as defined by the loan and employment agreements
8. Restricted cash
In August 2002, AdStar was informed by Chase Merchant Services, L.L.C
(Chase), a merchant bank that provides credit card processing services for
AdStar, that it required the Company to maintain a restricted cash balance
of $175,000. Chase indicated the primary reason for the reserve was the
significant increase in dollar volume of AdStar transactions during the
second quarter 2002. Under the terms of the agreement the Company can
terminate the contract with 30 days notice and Chase can retain a reserve
for up to six months from the date of termination.
The Company has entered into a new arrangement with another merchant
banker whereby the initial terms and conditions do not require AdStar to
provide a reserve. Preliminary testing for the changeover was completed in
early November 2002, and a final transition to the new banker is expected
to be completed before December 31, 2002.
9. Subsequent event
In November 2002 the Company signed a non-binding letter of intent with
Tribune Company for an additional investment by Tribune of $1,500,000. As
part of the proposed transaction, AdStar will develop additional features
that expand the capabilities of its generic service and the customized
services that were launched in August 2002. The proposed investment will
be in the form of an initial purchase by Tribune of $900,000 of new Series
B-1 preferred stock and a subsequent purchase, subject to the conditions
described below, of $600,000 of new Series B-2 preferred stock. The
purchase price for each share of the Series B-1 and Series B-2 preferred
stock will be the lower of $0.75 or the fair market value of AdStar common
stock at the time of the respective closing. The subsequent purchase by
Tribune is subject to AdStar stockholder approval and the fulfillment by
AdStar of certain obligations under its agreement with Tribune. If the
conditions are not satisfied, Tribune will have the right to sell its
shares of Series B-1 preferred stock back to AdStar.
The transaction is subject to customary corporate approvals, and also
conditioned upon AdStar and Tribune's agreeing to and signing definitive
agreements and satisfying the various customary closing conditions that
may be contained in those agreements. The definitive agreement and share
price are subject to change, and accordingly, the Company is still
examining any potential impact the transaction may have on its financial
statements when completed.
11
Item 2. Management's Discussion and Analysis or Plan of Operation
The following discussion of our financial condition and results of operations
should be read in conjunction with the financial statements and related notes to
the financial statements included elsewhere in this quarterly report. Certain
statements in this discussion and elsewhere in this report constitute
forward-looking statements within the meaning of Section 21E of the Securities
and Exchange Act of 1934 and are subject to the "Risk Factors" included in our
Annual Report on Form 10-KSB/A for our fiscal year ended December 31, 2001 and
in our registration statement on form S-3 filed with the Securities and Exchange
Commission on June 28, 2002. Because this discussion involves risk and
uncertainties, our actual results may differ materially from those anticipated
in these forward-looking statements.
Overview
During the first quarter 2002, we focused our efforts on raising equity capital
and the development and customization arrangements with Tribune Company. In
January 2002, we completed the private placement that had been in process at the
year ended December 31, 2001, raising an additional $150,000 in gross proceeds.
In February 2002, we raised an additional $50,000 in gross proceeds from a
subsequent private placement. Combined, these two transactions raised
approximately $157,000 in net proceeds.
In March 2002, we entered into a series of significant contracts with Tribune
Company. Under these agreements, we sold 1,443,457 shares of Series A preferred
stock to Tribune Company for net proceeds totaling approximately $1,728,000.
Additionally, we agreed to develop and customize a version of our Web software
applications to provide for Web-based technology for recruitment classified
advertising sales to all major market Tribune newspapers and on-line services in
exchange for earning volume-based ASP fees for ads placed through the Web using
our customized software. This customization will provide a platform that allows
Tribune-owned newspapers, together with CareerBuilder, L.L.C.
(www.careerbuilder.com), to receive recruitment advertising from agencies,
corporate customers, and the general public. From a practical standpoint, the
customization for this initial contract was substantially completed during the
third quarter 2002, with the first publication launched in August 2002. However,
it is not yet fully deployed and therefore has not yet begun to fully process
the recruitment advertising and perform the related transactions it is
ultimately contemplated to achieve. While we are realizing the contracted
minimum revenues we will continue to incur development related expenditures to
complete the deployment effort, which is scheduled to be completed during the
fourth quarter 2002. We believe that the potential future revenues derived from
the use of our technology by Tribune and CareerBuilder justify the up-front
expenditures required to complete the enhancements.
In November 2002 the Company signed a non-binding letter of intent with
Tribune Company for an additional investment by Tribune of $1,500,000. As part
of the proposed transaction, AdStar will develop additional features that expand
the capabilities of its generic service and the customized services that were
launched in August 2002. The proposed investment and related development is
expected to run concurrently with the deployment of the remainder of the
individual publications and it is anticipated that it will be fully deployed by
May 2003. While the funding is expected to be sufficient to continue and
complete the development of the customized services there are no new minimum
revenues contemplated in the agreement. We believe the additional features and
expanded capabilities of the new development combined with that of the initial
contract will ultimately attract more end users and provide Tribune as well as
other publishing companies a platform from which to launch other related web
based products, such as auto and real estate ads, which will ultimately be
realized in the form of increased transaction volume and related revenues. We
believe that the potential future revenues derived from the use of our
technology by Tribune and CareerBuilder justify the incremental expenditures
required to complete the enhancements.
12
Our ASP business is continuing to demonstrate approval in the marketplace.
During the last three quarters of 2002 we have experienced large increases in
Web-based transaction volumes on behalf of our existing customers, including
substantial increases in volume from the Knight-Ridder, Inc. publications, set
up during the fourth quarter 2001. Revenue earned from our new ASP business
improved substantially quarter over quarter, increasing 19% this quarter
compared to the second quarter 2002 and 48% this quarter from the first quarter
2002. We expect this increase to continue throughout the year. During the third
quarter 2002, on behalf of our customers we processed a total of 54,600
transactions through our web site generating gross billings in excess of
$4,735,000. We recognized revenues of $263,000 on these transactions. For the
same quarter in 2001 we processed a total of 25,700 transactions generating
gross billings in excess of $2,145,000 for which we recognized $78,000 of
revenues. For the nine months ended September 30, 2002 we processed a total of
134,900 transactions generating gross billings in excess of $11,557,000 for
which we recognized $663,000 of revenues. For the nine months ended September
30, 2001 a total of 66,600 transactions were processed generating gross billings
of approximately $5,459,000 for which we recognized $164,000 of revenues. We are
delighted with the level of incremental revenue our customers are able to
generate using our software applications and we believe that this success gives
us the opportunity to enter into arrangements to provide Web-based ad-taking
technology for new customers. This success serves to confirm that we have
developed a viable foundation that exploits our proprietary software products,
extensive industry knowledge, and unique position within the marketplace. As we
are early in the life cycle of our ASP business, we are continuing to critically
evaluate all products, their profit contributions, and potential line extensions
that may be of benefit to our existing customers as well as our potential
customers. Customization services, which traditionally had been a large
percentage of our revenue, were significantly down for the first nine months of
2002 from the same period in 2001. This reflects reduced capital spending at
newspapers resulting from lower advertising revenues caused by the general
economic downturn since the fourth quarter of 2001. As we continue to add more
newspapers as ASP customers and add increased services to existing customers, we
will be better positioned to weather economic downturns.
Description of Business
Under our ASP business model we developed a new e-business application
suite that is an enterprise class software solution allowing print and on-line
publications to electronically receive completed classified advertising copy
using the Internet as the communication channel. This new application suite was
developed in conjunction with our existing customers, and in response to their
need for a software solution supporting both business-to-business (B-to-B)
operations and business-to-customer (B-to-C) operations. These software
solutions enable our customers to expand the relationships with their customers
using a single integrated platform, while increasing sales volumes at reduced
costs. Our software allows newspapers to turn their on-line presence into an
e-commerce-enabled, revenue generating Web site. We believe that our ASP product
and services provide our customers an opportunity to generate incremental
revenue from their on-line business while increasing the number of visitors to
their Web site.
Our new e-business application suite includes two main products that can
be purchased separately or as a fully integrated software solution:
o Professional software ("Professional Product") - This technology is
designed for use by the professional marketplace. Specifically, our
software allows publishers to receive
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transmissions from classified advertising agencies and corporations
using advanced Web-based technology. The software includes
sophisticated pricing algorithms to provide for maximum flexibility
and intricate design resources to provide unlimited creative
capabilities. The recently released Web version of this software has
been favorably received. This software solution utilizes the
Internet as the communication method, which significantly improves
the intuitive nature of the application and allows the advertiser to
increase the speed of each transmission by utilizing existing
high-speed Internet connections. Should a high-speed Internet
connection not be available, the advertiser can install a desktop
version of this software that utilizes modem communication.
o ASP Web site technology ("ASP Product") - This technology is a
publisher-specific ad-taking Web site service designed to enhance a
publication's Web site by allowing the general public to execute
transactions to purchase classified advertising. Specifically, it is
an integrated application suite that offers visitors to a
newspaper's Web page the opportunity to buy classified ads, for both
the print and/or on-line editions of the newspaper, in real-time, on
a 24/7 basis. This product allows a publication to completely
outsource the classified ad-taking power of their Web site whereby
the publication receives incremental revenue at a very low
incremental cost. We handle all functions associated with this
revenue source. We furnish and host the application suite, run the
technology, monitor the transactions throughout the session, handle
the payment authorization and settlement process, electronically
deliver the ad text to the newspaper, and provide customer service
support to the newspaper's customers. We provide all the technical
and application expertise, customer support, and security measures
that the publication needs to get an application up and running in a
short time. Typically, we are able to process many more ads and do
so much more quickly and affordably than the publisher could do
internally. In addition, this software solution provides tools to
evaluate performance, provide additional customer care, and increase
future revenue opportunities. We provide the means to deliver highly
personalized email communications to existing customers for the
purpose of creating additional revenues and creating a profitable,
long-term relationship.
Both software products allow transactions to be executed through the
Internet. Our application suite is designed to be quickly integrated into our
customer's existing publishing software and readily expands as our customer's
needs and business grows. Our products use a single platform to connect and
integrate transmissions between multiple browsers and multiple technology
standards. In continually ensuring that our AdStar software solution works with
all available technology standards, we solve the problems created for our
customers because advertisers create and deliver content using ever changing
technology with multiple standards, multiple browsers and evolving network
infrastructures. By bridging disparate technologies in a way that seamlessly
allows for communication and transmission of advertising copy, we alleviate this
obstacle for our customers, freeing them to focus on their business.
Both lines of business require fees to customize the AdStar software
solution to the technical specifications for each publication. In addition, we
charge ongoing monthly fees to manage the ad-taking process, provide technical
support, supply a customer service phone room, and manage the entire e-commerce
function. The monthly fees include a small hosting fee plus a fee based on
transaction volumes and structured in such a way that we are, in essence
partnering with our customers. Therefore, when our customer's revenue volume
increases, our revenue will also increase. With this structure, we are able to
offer superior service in a manner that is cost effective for publishers of all
sizes.
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In developing our Web-based system we began to incur expenses in 1998 that
could not be offset by the revenues generated by our historical business. These
expenses caused us to incur losses in 1998, 1999, 2000, 2001 and first three
quarters of 2002. Our future success is dependent upon our ability to
substantially grow revenues to the point where we can fund the current level of
operations. To this end, our plans include expanding the products and services
offered to our customers by building on our (i) proprietary software processes,
(ii) established customer relationships, and (iii) unique position within the
industry. We feel that there is significant opportunity to increase revenues by
offering the Web software and customer support services that we had initially
developed for our Web-based national portal, "Advertise123.com," to print
publications under the ASP business model.
In addition to the AdStar software solution, we have also developed
Advertise123.com, a one-stop marketplace on the Web for the general public to
buy classified ads. Through Advertise123.com, the general public can compose
professional looking classified ads using one of several pre-programmed
templates, schedule the ad to run in one or several of over 200 newspapers and
50 state newspaper associations, and purchase the ad using a credit card, all on
a 24/7 basis. We receive a small fee for this service.
Results of Operations
The following table sets forth the results of operations expressed as a
percentage of revenues:
Three months ended Nine months ended
September 30, September 30,
----------------------------------------------------------
2001 2002 2001 2002
---- ---- ---- ----
Revenues 100% 100% 100% 100%
Cost of revenues 32% 44% 36% 46%
--- --- --- ---
Gross profit 68% 56% 64% 54%
Selling expense 27% 20% 32% 26%
Administrative expenses 64% 71% 89% 82%
Development expenses 15% 17% 24% 25%
--- --- --- ---
Loss from operations -39% -52% -81% -78%
Other Income -- -- -- 3%
--- --- ---
Interest income (expense) 1% -- 2% 1%
--- --- --- ---
Loss before taxes -38% -52% -79% -74%
Provision for income taxes -- -- -- --
--- --- --- ---
Net loss -38% -52% -79% -74%
Three and nine month periods ended September 30, 2002 and 2001
Revenues. - Net revenues for the third quarter 2002 increased 2% to
$655,000 compared to third quarter 2001 net revenues of $640,000. Fees from our
ASP Product increased 239% to $263,000 during the third quarter 2002 from
$78,000 in the third quarter 2001. Revenue from software customization services
decreased 53% during the third quarter 2002 to $94,000 from $201,000 in the
third quarter 2001. Revenues from miscellaneous and non-recurring items
decreased 53% during the third quarter 2002 to $28,000 from $60,000 in the third
quarter 2001. Fees from our Professional Product decreased 10% to $270,000
during the third quarter 2002 from $301,000 during the third quarter 2001.
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Net revenues for the nine months ended September 30, 2002 increased 5% to
$1,697,000 compared to $1,612,000 for the nine months ended September 30, 2001.
ASP fees for the nine months ended September 30, 2002 increased 304% to $663,000
from $164,000 for the nine months ended September 30, 2001. Customization
revenue for the nine months ended September 30, 2002 decreased 67% to $133,000
from $407,000 for the nine months ended September 30, 2001. Revenue from
miscellaneous and non-recurring items for the nine months ended September 30,
2002 decreased 51% to $88,000 from $178,000 for the nine months ended September
30, 2001. Fees from our Professional Product decreased 6% to $813,000 for the
nine months ended September 30, 2002 from $863,000 during the nine months ended
September 30, 2001. The decrease in software customization is a by-product of
the trend to defer capital expenditures in the publishing industry due to the
general economic climate; we anticipate the deferral to continue through the
rest of the year. The decrease in Professional Product is primarily due to the
transition of existing customers from the Professional Product line to our ASP
Product; this trend is expected to continue. We expect that revenue from our ASP
Product will continue to increase as we increase both the number of customers
and the transaction volume we process on behalf of those customers.
Cost of Revenues - Cost of revenue consists primarily of the costs to
customize and install the AdStar software applications, configure end-user
software, install Web-based ad-taking software, provide customer training and
end-user support, amortization of internally developed application modules,
royalties, and co-location costs. These costs increased to approximately
$290,000 for the third quarter 2002 compared with $205,000 for the third quarter
2001. Our gross profit margin decreased to 56% during the third quarter 2002,
from 68% during the third quarter 2001. This increase in cost of revenues
primarily resulted from an increase in the amortization of software development
costs to $90,000 in the third quarter 2002 from $43,000 in the third quarter
2001.
Cost of revenues for the nine months ended September 30, 2002 increased to
$776,000 from $577,000 for the nine months ended September 30, 2001. Our gross
profit margin for the nine months ended September 30, 2002 decreased to 54% from
64% for the nine months ended September 30, 2001. This increase in cost of
revenues primarily resulted from an increase in the amortization of software
development costs to $264,000 for the nine months ended September 30, 2002 from
$110,000 for the nine months ended September 30, 2001. Given our current level
of Web automation, we will be able to manage significantly greater transaction
volumes with limited increases to our current staffing levels. Accordingly, we
expect a corresponding increase in cash to be generated from our gross profits.
Selling Expense. - Selling expense consists primarily of direct charges
for advertising, sales promotion, marketing, and trade shows, as well as the
cost for business development. Selling expense decreased 25% during the third
quarter 2002 to $131,000 from $174,000 during the third quarter 2001. This
decrease primarily resulted from the reduction of personnel-related expenses to
$116,000 during the third quarter 2002 from $163,000 for the third quarter 2001.
Selling expense for the nine months ended September 30, 2002 decreased 15%
to $435,000 from $512,000 for the nine months ended September 30, 2001.
Personnel-related expenses for the nine months ended September 30, 2002
decreased 10% to $399,000 from $443,000 for the nine months ended September 30,
2001. Non-personnel related expenses for trade shows, marketing and promotion
for the nine months ended September 30, 2002 decreased 48% to $36,000 from
$69,000 for the nine months ended September 30, 2001. In future quarters, we can
expect to see some incremental increase in selling expenses as compared to the
last three quarters as we continue the development of our strategic
relationships with Tribune Company, Knight-Ridder, Inc., CareerBuilder, L.L.C.,
and other potential strategic partners.
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Administrative Expenses. - Administrative expense consists primarily of
the cost of executive, administrative, professional fees, accounting, finance,
and information technology personnel. Administrative expenses increased 13%
during the third quarter 2002 to $465,000 from $412,000 during the third quarter
2001. The increase was primarily related to professional fees and other
non-personnel related expenses.
Administrative expenses for the nine months ended September 30, 2002
decreased 3% to $1,396,000 from $1,434,000 for the nine months ended September
30, 2001. Personnel-related expenses for the nine months ended September 30,
2002 decreased to $821,000 from $1,139,000 for the nine months ended September
30, 2001, the decrease was primarily due to an overall reduction in personnel
during 2001; and the sustainment of the lower counts through the first quarter
of 2002, until increased activity required an increase in staffing levels. Legal
fees for the nine months ended September 30, 2002 increased to $182,000 from
$40,000 for the nine months ended September 30, 2001. This is primarily due to a
significant increase in outside legal expenses during the first quarter 2002
related to financing negotiations and general corporate advice. Although we
expect that quarterly administrative expenses overall will be lower in
comparison to the prior year, during the remainder of 2002, personnel-related
expenses may increase incrementally from the first nine months, as we have added
some additional administrative headcount, and are incurring an approximate 10%
increase in Directors & Officers insurance and anticipate a similar increase in
health care costs in the fourth quarter 2002 as dictated by current market
conditions.
Development Expenses. - Development expenses consist of expenses to
identify functional requirements, to plan, identify and conceptually design the
required technical infrastructure, and to perform Web-site maintenance and other
general routine fixes. The costs consist primarily of personnel related expenses
for technical and design personnel and consultants. Development expense for the
third quarter 2002 increased 12% to $110,000 from $98,000 for the third quarter
2001. Personnel-related expenses decreased 4% to $87,000 in the third quarter
2002, as compared to $91,000 for the third quarter 2001.
Development expense for the nine months ended September 30, 2002 increased
6% to $417,000 from $392,000 for the nine months ended September 30, 2001. The
increase was due to approximately $44,000 in one-time costs for outside
consultants to create the conceptual design and feasibility study for Tribune
Company product prior to execution of our agreement with them during the first
quarter of 2002, offset by a decrease in personnel-related expenses for the nine
months ended September 30, 2002 to $359,000 from $371,000 for the nine months
ended September 30, 2001.
Other Income (Expense) - Other income expense has historically been
comprised of net interest income (expense). During the second quarter 2002
AdStar finalized a settlement with Kodak, Inc. whereby Kodak returned 67,796
shares of AdStar common stock resulting in a non-cash gain of approximately
$63,000. Net interest income decreased 61% during the third quarter 2002 to
$3,000 from $7,000 during the third quarter 2001. This decrease is attributable
to a reduction in cash held in interest bearing accounts as we utilized cash to
fund development projects and operating deficits, a reduction in interest rates
available in short-term time deposits and money market accounts at commercial
banks, as well as an increase in interest expense during the quarter relating to
the addition of capital leases. Net interest income for the nine months ended
September 30, 2002 decreased 50% to $13,000 from $26,000 for the nine months
ended September 30, 2001.
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Liquidity and Capital Resources
As of September 30, 2002, we had cash and cash equivalents of
approximately $385,000 and restricted cash of $175,000. Net cash used in
operations was approximately $1,039,000 for the nine months ending September 30,
2002 compared with $1,018,000 for the comparable 2001 period. Net cash used in
investing activities increased to $804,000 for the nine months ended September
30, 2002 compared with $621,000 in the same period in 2001. The increase is
primarily a result of the $210,000 in loans to two officers. Net cash provided
by financing activities increased by $1,816,000 for the nine months ended
September 30, 2002 compared with $409,000 in the same period in 2001. The
increase is primarily due to the net proceeds of $1,723,000 from the issuance of
Series A preferred stock to Tribune Company and a net increase of restricted
cash of $129,000 as compared to the comparable period in 2001.
As a result of the equity raised during the first quarter 2002 and the
anticipated $1,500,000 funding from Tribune during the fourth quarter 2002 and
first quarter 2003 per the terms of a non-binding letter of intent signed in
November 2002, we expect our available funds, combined with cash generated from
existing operations, new customers, and the flexibility to cut back our
work-force should anticipated significant customization projects be delayed or
terminated, will be sufficient to meet our anticipated working capital needs
through September 30, 2003. We have generated operating losses during the past
four years, and we cannot guarantee that the assumed financing from the Tribune
letter of intent will be funded, increases in revenue will occur in a timely
manner, that we will be able to contain our costs in accordance with our plans,
nor that we have accurately estimated the resources required to fulfill our
obligations to Tribune Company. Although we are optimistic that our new ASP
business will continue to be accepted in the marketplace and we will fulfill our
obligations to Tribune Company in a timely manner, the timing is not assured.
Our ability to sell ASP business products and service offerings during the
current year may be hampered by the current downturn in the advertising market
and state of the economy in general. These factors, coupled with the extended
time frame required for software sales, customization, and implementation, could
delay our ability to increase revenue to a level sufficient to cover our
expenses.
In August 2002, AdStar was informed by Chase Merchant Services, L.L.C
(Chase), a merchant bank that provides credit card processing services for
AdStar, that it required the Company to maintain a restricted cash balance of
$175,000. Chase indicated the primary reason for the reserve was the significant
increase in dollar volume of AdStar transactions during the second quarter 2002.
Under the terms of the agreement the Company can terminate the contract with 30
days notice and Chase can retain a reserve for up to six months from the date of
termination.
The Company has entered into a new arrangement with another merchant
banker whereby the initial terms and conditions do not require AdStar to provide
a reserve. Preliminary testing for the changeover was completed in early
November 2002, and a final transition to the new banker is expected to be
completed before December 31, 2002.
As discussed above we have entered into a non-binding letter of intent
with Tribune to purchase preferred stock of the Company for $1,500,000. There is
no assurance that Tribune will fund the agreement. We currently have no
additional borrowings available to us under any credit arrangement, and we will
look for additional debt and equity financing's should the Tribune investment be
delayed or cancelled. Adequate funds may not be available or may not be
available on terms acceptable to us. If additional funds are raised through the
issuance of equity securities, dilution to existing stockholders may result. If
funding is insufficient at any time in the future, we may be unable to develop
or enhance our products or services, take advantage of business opportunities or
respond to competitive pressures, any of which could have a material adverse
effect on our financial position, results of operations and cash flows.
18
Item 3. Evaluation Of Disclosure Controls And Procedures
a) Evaluation of Disclosure Controls and Procedures. Our chief executive officer
and our chief financial officer, after evaluating the effectiveness of the
Company's "disclosure controls and procedures" (as defined in the Securities
Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a date (the
"Evaluation Date") within 90 days before the filing date of this quarterly
report, have concluded that as of the Evaluation Date, our disclosure controls
and procedures are adequate and designed to ensure that material information
relating to us would be known to them.
b) Changes in Internal Controls. There were no significant changes in our
internal controls or in other factors that could significantly affect our
disclosure controls and procedures subsequent to the Evaluation Date.
PART II
Item 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities.
AdStar established a vendor payment plan whereby it may compensate vendors
in shares of its common stock in lieu of cash. Under the plan, 400,000 shares
are available for issuance. In the nine month period ended September 30, 2002,
12,473 shares were issued to vendors under the plan relying upon the exemption
under sections 4(2) and 4(6) of the Securities Act of 1933 and which represented
compensation for the period of $11,250. The vendors have taken the shares for
investment.
In January 2002, AdStar completed a private placement of 1,300,000 shares
of its common stock at a price of $0.50 per share, through the sale of the
remaining 300,000 shares. 1,000,000 shares were sold during the period of
October 2001 through December 2001. These shares were sold to accredited
investors, as defined under Rule 215 of the Securities Act of 1933, and required
a minimum investment of $25,000. In connection with this offering AdStar issued
warrants to purchase 130,000 shares of its common stock, at $0.75 per share, as
part of the placement agent fees. The warrants expire on January 16, 2007 and
have anti-dilution protection against capital changes. In addition, AdStar
issued to Morse, Zelnick, Rose and Lander LLP, AdStar's legal counsel, 114,545
shares of restricted common stock, issued at fair market value in full
settlement of a $62,500 liability. These offerings were exempt from registration
made pursuant to Sections 4(2) and 4(6) of the Act.
In February 2002, AdStar sold to an accredited investor (as previously
defined) 100,000 shares of its common stock at a price per share equal to 85% of
its per share closing price on January 31, 2002 ($0.50). In connection with this
sale AdStar issued warrants to purchase 10,000 shares of its Common Stock, at
$0.75 per share, as part of the placement agent fees. The warrants expire on
January 31, 2007 and have anti-dilution protection against capital changes. This
sale was exempt from registration made pursuant to Sections 4(2) and 4(6) of the
Act.
In March 2002, AdStar sold 1,443,457 shares of its Series A Preferred
Stock to Tribune Company for an aggregate purchase price of $1.8 million. These
shares currently convert on a 1:1 basis. Shareholders of Series A Preferred
Stock are entitled to vote on all matters submitted to the stockholders for vote
and as a single class with the common stock. The holders of Series A Preferred
Stock are entitled to one vote for each share of common stock issuable upon
conversion.
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Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
Exhibit No. Description
----------- -----------
99.1 Chief Executive Officer Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002, filed with the Securities and
Exchange Commission on the date hereof.
99.2 Chief Financial Officer Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002, filed with the Securities and
Exchange Commission on the date hereof.
b. Reports on Form 8-K:
None
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AdStar, Inc
(Registrant)
Date November 14, 2002 /s/ Leslie Bernhard
----------------- ----------------------
President & CEO
Date November 14, 2002 /s/ Anthony J. Fidaleo
----------------- ----------------------
Chief Financial Officer
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CERTIFICATIONS
I, Leslie Bernhard, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Adstar, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to us
particularly during the period in which this quarterly report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, 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 in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/ Leslie Bernhard
-------------------
Leslie Bernhard
Chief Executive Officer
22
I, Anthony J. Fidaleo, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Adstar, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to us
particularly during the period in which this quarterly report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, 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 in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Anthony J. Fidaleo
----------------------
Anthony J. Fidaleo
Chief Financial Officer
23