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 March 31, 2003
[_] 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 of incorporation or organization) (IRS Employer Identification No.)
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 May 7, 2003 the Issuer had
outstanding 8,328,530 shares of its common stock, including 69,145 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
March 31, 2003
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Interim condensed financial statements
(unaudited)
Balance Sheet - March 31, 2003 3
Statements of Operations For the three month periods ended
March 31, 2002 and 2003 4
Statements of Cash Flows For the Three month periods ended
March 31, 2002 and 2003 5
Notes to Interim Financial Statements 6
Item 2. Management's Discussion and Analysis or Plan of Operation 14
Item 3. Controls and Procedures 21
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 21
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 22
2
AdStar, Inc.
Balance Sheet
March 31, 2003 (unaudited)
Assets
Current assets:
Cash and cash equivalents $ 1,150,728
Restricted cash 174,918
Accounts receivable, net of allowance for doubtful accounts of $49,672 154,048
Notes receivable from officers - current portion 7,280
Prepaid and other current assets 159,917
------------
Total current assets 1,646,891
Notes receivable from officers, net of current portion 238,086
Property and equipment, net 2,628,675
Intangible assets, net 37,448
Other assets 31,413
------------
Total assets $ 4,582,513
============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,294,691
Accrued expenses 514,975
Deferred revenue 142,298
Capital lease obligations - current portion 30,699
------------
Total current liabilities 1,982,663
Capital lease obligations, net of current portion 41,744
------------
Total liabilities 2,024,407
Commitments and contingencies
Stockholders' equity:
Convertible Preferred stock, par value $0.0001; authorized 5,000,000 shares;
issued and outstanding:
Series A, 1,443,457 issued and outstanding; liquidation preference of $1,930,656 1,697,840
Series B-2, 2,000,000 issued and outstanding; liquidation preference of
$1,512,354 1,348,298
Common stock, par value $0.0001; authorized 20,000,000 shares;
8,238,530 shares issued and outstanding 833
Additional paid-in capital 11,347,819
Treasury stock, par value $0.0001; 67,796 shares (67,796)
Accumulated deficit (11,768,888)
------------
Total stockholders' equity 2,558,106
------------
Total liabilities and stockholders' equity $ 4,582,513
============
The accompanying notes are an integral part of these interim financial
statements.
3
AdStar, Inc.
Statements of Operations
For the three month periods ended
March 31, 2002 and 2003 (unaudited)
Three months ended
March 31,
---------- ----------
2002 2003
---------- ----------
ASP, net $ 166,645 $ 322,259
Licensing and software 285,755 215,702
Customization and other 47,810 55,132
---------- ----------
Net revenues 500,210 593,093
Cost of revenues, including depreciation and
amortization of $85,617 and $144,417 225,716 334,911
---------- ----------
Gross profit 274,494 258,182
General and administrative expense 469,589 288,990
Selling and marketing expense 156,202 161,138
Product maintenance and development expenses 219,621 252,841
---------- ----------
Loss from operations (570,918) (444,787)
Interest income, net 3,673 935
---------- ----------
Loss before taxes (567,245) (443,852)
Provision for income taxes 1,765 963
---------- ----------
Net loss $ (569,010) $ (444,815)
========== ==========
Loss per share - basic and diluted $ (0.07) $ (0.05)
Weighted average number of shares - basic and
diluted 8,101,789 8,197,324
The accompanying notes are an integral part of these interim financial
statements.
4
AdStar, Inc.
Statements of Cash Flows
For the three month periods ended
March 31, 2002 and 2003 (unaudited)
2002 2003
---------- ----------
Cash flows from operating activities:
Net loss $ (569,010) $ (444,815)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 135,197 180,519
Stock based vendor payments 21,052 53,751
Changes in assets and liabilities:
Accounts receivable (351,013) 1,111
Prepaid and other assets 26,512 (16,032)
Accounts payable 292,493 168,266
Accrued expenses (114,890) (40,842)
Deferred revenue 142,376 28,727
---------- ----------
Net cash used in operating activities (417,283) (69,315)
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment (86,482) (250,327)
Principal repayments of shareholder notes receivable 1,767 1,758
---------- ----------
Net cash used in investing activities (84,715) (248,569)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of note payable -- 200,000
Repayment of note payable -- (200,000)
Proceeds from sale of common stock in private placement 156,649 --
Proceeds from issuance of Series A preferred stock 1,782,159 --
Proceeds from issuance of Series B-2 preferred stock -- 534,578
Proceeds from capital leases 2,345 --
Principal repayments on capital leases (1,270) (6,344)
---------- ----------
Net cash provided by financing activities 1,939,883 528,234
---------- ----------
Net increase in cash and cash equivalents 1,437,885 210,350
Cash and cash equivalents at beginning of period 411,539 940,378
---------- ----------
Cash and cash equivalents at end of period $1,849,424 $1,150,728
========== ==========
Supplemental cash flow disclosure:
Taxes paid $ 6,645 $ 5,494
Interest paid $ 382 $ 4,093
Non cash investing and financing activities
Conversion of note payable and accrued interest to common stock $1,186,966 $ --
Conversion of accrued legal fees to common stock $ -- 50,000
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
March 31, 2003 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2003. 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 for the year ended December 31, 2002.
For the three-month period ended March 31, 2003, the Company had
incurred a cash outflow from operations of approximately $69,000 and
as of March 31, 2003, the Company had negative working capital of
$335,772. Based on the Company's current operating plans, management
believes existing cash resources, cash forecasted by management to be
generated by operations and managements historical ability to obtain
bridge financing, if necessary, will be sufficient to meet working
capital and capital requirements through March 31, 2004. 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 development contracts in
association with the sale of Series B preferred stock, closed in March
2003, expected to be substantially completed by the end of 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 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 March 31, 2003 and 2002, no customer
accounted for 10% of the Company's revenues. At March 31, 2003, eight
customers in the aggregate accounted for 68% of the Company's accounts
receivable. The majority of the Company's customers have historically
consisted of newspapers and publishers of classified advertisements.
6
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:
Licensing and customization and other revenues - The Company generates
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 includes 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 results of operation. 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 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
7
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.
Web site Software Development Costs
In March 2000, the Financial Accounting Standards Board's Emerging
Issue Task Force ("EITF") issued EITF No. 00-2 "Accounting for Web
Site Development Costs", which provides guidance with respect to
capitalization of certain costs incurred in connection with Web
development activities and references Statement of Financial
Accounting Standards ("SFAS") No. 86 "Accounting for the Cost of
Computer Software to be Sold, Leased or Otherwise Marketed". In
accordance with these pronouncements, costs to establish the
technological feasibility of software applications developed by the
Company are charged to expense as incurred. Certain costs incurred
subsequent to achieving technological feasibility are capitalized.
Accordingly, the Company capitalizes a portion of the internal labor
costs and external consulting costs associated with essential Web site
development and enhancement activities. Costs associated with
conceptual design and feasibility assessments as well as maintenance
and routine changes are expensed as incurred. Capitalized costs are
amortized based on current or future revenue for each product with an
annual minimum equal to the straight-line basis over the estimated
useful lives of the applications. In accordance with this policy, the
Company has capitalized expenditures incurred to develop the new
AdStar e-business application suite. At March 31, 2003, the Company
has capitalized software development costs of $3,115,255, with
associated accumulated amortization of $805,320.
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 March 31, 2002 and 2003, diluted loss per share
does not include 3,226,730 and 6,041,932, respectively, of options and
warrants to purchase common stock and 1,443,457 and 0, and 1,443,457
and 2,000,000 respectively, of shares issuable upon the conversion of
Series A and B-2 preferred stock to common stock, as their inclusion
would be antidilutive.
8
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 before the
deduction of related expenses. 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 provide a
platform that allows Tribune owned newspapers, together with
CareerBuilder, L.L.C., 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 included in property and equipment in the balance sheet.
Through March 31, 2003, $594,189 in development and customization
costs have been capitalized. As of March 31, 2003 the Company launched
the FlexAds(R) service on seven 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 $7,500 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 during any month for the quarter ended March 31, 2003.
In December 2002 the Company entered into an agreement with Tribune
Company for an additional investment by Tribune of $1,500,000. As part
of the 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 investment is in the
form of an initial purchase by Tribune of $900,000 for 1,200,000
shares of Series B-1 preferred stock which funded in December 2002 and
a subsequent purchase, of $600,000 for 800,000 shares of Series B-2
preferred stock, plus additional shares issued for accrued dividends
on Series B-1. The purchase price for each share of the Series B-1 and
Series B-2 preferred stock was $0.75 at or below the fair market value
of AdStar common stock at the time of the respective closing. These
shares carry a liquidation preference that includes a dividend of 7%
per year available only upon liquidation and currently convert on a
1:1 basis. Shareholders of Series B Preferred Stock are entitled to
vote on all matters submitted to the stockholders for vote and vote as
a single class with the shareholders of our Common Stock. The holders
of Series B preferred stock are entitled to one vote for each share of
common issuable upon conversion.
4. Convertible preferred stock
In March 2003, AdStar sold 800,000 shares of its Series B-2 Preferred
Stock to Tribune Company for an aggregate purchase price of $600,000.
These shares currently convert on a 1:1 basis. Shareholders of Series
B-2 Preferred Stock are entitled to vote on all
9
matters submitted to the stockholders for vote and as a single class
with the Common Stock. The holders of Series B-2 Preferred Stock are
entitled to one vote for each share. In addition, on March 28, 2003,
in exchange for all of the Series B-1 Preferred Stock plus accrued and
unpaid dividends on those shares, issued in December 2002 to Tribune
Company, AdStar issued an additional 1,200,000 shares of its Series
B-2 Preferred Stock to the Tribune Company.
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"), 1,200,000 shares have been designated as Series
B-1, convertible preferred stock and 800,000 shares have been
designated as Series B-2, convertible preferred stock ("Series B
preferred stock"). The remaining authorized shares have not been
designated.
At March 31, 2003, the Company has reserved 1,443,457 shares of common
stock for issuance upon the conversion of the Series A and 2,000,000
Series B preferred stock. The Series A and B preferred stock have the
following characteristics:
Voting Rights - Each holder of the Series A and B 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 and B 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 and B preferred stock will be entitled to receive in preference to
the holders of the common stock, an amount per share equal to $1.244
and $0.75 accrued and unpaid dividends, respectively. After such
payment, the Series A and B preferred stockholders share equally with
the common stockholders in any remaining assets or funds of the
Company.
Conversion - Each share of the Series A and B 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 for series A and $0.75 for series B. 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. All Series B preferred stock
will automatically convert to common stock on the first day after
December 23, 2005 for which the market price of the Company's common
stock exceeds $1.50 per share.
Dividends - Dividends on the Series A and B preferred stock shall
accrue cumulatively at 7% per annum through the date of liquidation or
conversion. In the event of conversion all accrued and unpaid
dividends will be waived. The 7% cumulative dividend has not been
shown as a deduction from net loss applicable to common shareholders,
since the dividends are only to be paid if a liquidation event occurs
and the dividends would be accrued from the original issuance date to
the date of the liquidating event. If the Series A
10
preferred stock is converted into common stock, the right to the
cumulative dividends will be waived.
5. Notes Payable
During March 2003, the Company entered into a 7% $200,000 unsecured
bridge note payable agreement with Tribune Company pending the closing
of the $600,000 funding on the Series B-2 preferred stock transaction.
During March 2003 the note was repaid out of the proceeds from the
$600,000.
6. Issuance of Common Stock
In January 2003, the Company issued 63,291 shares of common stock in
full settlement of $50,000 in accrued legal fees, payable to Morse,
Zelnick, Rose & Lander, LLP.
7. Officers notes receivable
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.
In November 2002 the Company entered into a new arrangement with
another merchant banker whereby the terms and conditions do not
require AdStar to provide a reserve. The Company terminated the
contract with Chase on April 30,2003 and subsequently $155,000 was
returned with the remaining $20,000 held in reserve for up to six
months.
9. Stock based compensation
The Company has adopted the disclosure only provisions of SFAS No.
148. If compensation cost associated with the Company's stock-based
compensation plan had been determined using the fair value prescribed
by SFAS No. 148, the Company's net
11
loss for the three months ended March 31, 2002 and 2003 would have
increased to the pro forma amounts indicated below:
Three months ended
March 31,
---------------------
2002 2003
--------- ---------
Net loss - as reported $(569,010) $(444,813)
Add: Stock based employee
compensation included in
reported loss -0- -0-
Deduct: Employee compensation expense (36,312) (68,153)
pro forma (605,322) (512,966)
Loss per share - as reported $ (0.07) $ (0.05)
pro forma $ (0.07) $ (0.06)
Because additional stock options are expected to be granted each year,
the above pro forma disclosures are not representative of pro forma
effects on reported financial results for future years.
10. Limitation of Directors' Liability and Indemnification
The Delaware General Corporation Law (the "DGCL") authorizes
corporations to limit or eliminate the personal liability of directors
to corporations and their shareholders for monetary damages for breach
of directors' fiduciary duty of care. The AdStar's Certificate of
Incorporation limits the liability of its directors to AdStar or its
stockholders to the fullest extent permitted by Delaware law.
AdStar's Certificate of Incorporation provides mandatory
indemnification rights to any officer or director of AdStar who, by
reason of the fact that he or she is an officer or director of AdStar,
is involved in a legal proceeding of any nature. Such indemnification
rights include reimbursement for expenses incurred by such officer or
director in advance of the final disposition of such proceeding in
accordance with the applicable provisions of the DGCL. Insofar as
indemnification for liabilities under the Securities Act of 1933 (the
"Act") may be provided to officers and directors or persons
controlling AdStar, AdStar has been informed that in the opinion of
the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore,
unenforceable.
The maximum potential amount of future payments the Company could be
required to make under the Certificate of Incorporation
indemnification agreement is unlimited. However, the Company has a
directors and officer liability insurance policy that limits its
exposure and enables it to recover a portion of any future amounts
paid. As a result of its insurance policy coverage, the Company
believes the estimated fair value of the indemnification agreement is
minimal and has no liabilities recorded for these agreements as of
March 31, 2003.
The Company enters into indemnification provisions under (i) its
agreements with other companies in its ordinary course of business,
typically with business partners,
12
contractors, customers, landlords and (ii) its agreements with
investors. Under these provisions the Company generally indemnifies
and hold harmless the indemnified party for losses suffered or
incurred by the indemnified party as a result of the Company's
activities or, in some cases, as a result of the indemnified party's
activities under the agreement. These indemnification provisions often
include indemnifications relating to representations made by the
Company with regard to intellectual property rights. These
indemnification provisions generally survive termination of the
underlying agreement. In addition, in some cases, the Company has
agreed to reimburse employees for certain expenses and to provide
salary continuation during short-term disability. The maximum
potential amount of future payments the Company could be required to
make under these indemnification provisions is unlimited. The Company
has not incurred material costs to defend lawsuits or settle claims
related to these indemnifications agreements. As a result, the company
believes the estimated fair value of these agreements is minimal.
Accordingly, the Company has no liabilities recorded for these
agreements as of March 31, 2003.
11. Restructuring costs
During 2001 the Company critically examined the processing
capabilities of its existing software modules and identified potential
new commercial applications that could be developed using our existing
technology as a starting point. With these changes in mind, we
repositioned our products, moving away from the idea of the Internet
as a stand-alone business category, and moving towards the idea of the
Internet as an extremely efficient and flexible communication channel.
During 2002 we continued executing our ASP model while maintaining the
existing infrastructure and personnel responsible for the historical
licensing and software and portal model while formulating a formal
transition plan.
The plan contemplated among other things the closure of the New York
office within approximately six months, a related reduction in force
of the 4 technology staff as of December 31, 2002 and the abandonment
of an externally created customized billing software module. While the
strategy had been in play for several months, including the addition
of office space in the corporate offices to facilitate the transition,
Management formally approved the final strategy in December 2002.
During December 2002 the Company hired a seasoned industry executive
to transfer the software programs and intellectual knowledge from the
New York office to the corporate office, identify and begin training
existing personnel in anticipation of the reduction-in-force, and
abandoned the billing software system. The corporate office will
assume full revenue responsibilities concurrently with the closing of
the office.
The following table summarizes the restructuring activity for the
Quarter ended March 31, 2003, these costs are included in accrued
expenses on the balance sheet:
Accrued restructuring Office Lease Legal and Other Total
--------------------- ------------ --------------- --------
Balance 12/31/02 $75,550 $118,674 $194,224
Charges (7,958) (44,398) (52,356)
------- -------- --------
Balance 03/31/03 $67,592 $ 74,276 $141,868
======= ======== ========
13
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 for our fiscal year ended December 31, 2002.
Because this discussion involves risk and uncertainties, our actual results may
differ materially from those anticipated in these forward-looking statements.
Overview
In 2001 we repositioned our products, moving away from the idea of the
Internet as a stand-alone business category, and moving towards the idea of the
Internet as an extremely efficient and flexible communication channel. We
recognized that this technology can be utilized to greatly enhance the
functionality of the software we licensed to our existing customer base, as well
as expand into new areas where our technology can be used to connect advertising
outlets with advertisers. During 2002, we began to execute our game plan and
spent virtually the entire year on successfully enhancing and integrating our
existing technology and new products into the existing and new customers. While
some of our historical business has migrated to our new transaction based model,
it continues to be used by hundreds of recruitment agencies and volume
advertisers. We expect additional customer requested enhancements to our
existing applications to generate additional revenues in 2003, particularly as
more publications adapt the new robust applications available to them.
In working with our customers, we recognized there was a great demand
for our Web-based technology within the newspaper industry to run the online
classified ad-taking abilities at our customer's Web sites under a private label
branded site concept. Therefore, we revised our business model to embrace these
concepts and we focused on the immediate needs of our customers. While doing
this, we also made sure that our technology remained flexible to allow for
changes as the needs of our customers change and as we develop product
extensions and new lines of business based on our existing technology and
expertise.
We adopted our marketing and sales strategies to our new Web-based
ad-taking ASP product, and began marketing the product in June 2001 and found
that it was well received by our customers. During 2001, we implemented our
Web-based classified ad-taking ASP product at 14 new metropolitan newspapers.
Given the severe downturn in advertising revenue in 2001, we were advised by
potential customers that implementing our ASP product will need to be deferred
until their advertising revenue has returned to more normal levels. In 2002,
despite a slow economy we contracted with 16 additional newspapers to use our
Web-based classified ad-taking ASP product.
In March 2002, we entered into an agreement with Tribune Company to
provide Web-based job recruitment ad sales technology to all major market
Tribune newspapers, including Chicago Tribune, Los Angeles Times, and Newsday,
and to provide customization services to CareerBuilder, a Tribune Company
affiliate. Under this arrangement, we have customized our existing application
suite to expand its capabilities and provide additional functionality in
exchange for the right to provide Web-based ad sales for Tribune Company's major
market newspapers. Beginning in the third quarter of 2002 the Tribune
Corporation launched a multimillion-dollar ad campaign promoting this new
product, FlexAd. AdStar created the Web-based version of FlexAd that allows
professional
14
advertisers and businesses to simultaneous compose, schedule, pay and place a
job recruitment ad in CareerBuilder and an affiliated newspaper.
In addition to the enhancements developed for our base technology, we
continued to actively explore and develop new revenue sources. In 2001, we
entered into an agreement with eBay, Inc. to provide the technology behind eBay
Seller Classified, a service that allowed eBay sellers to advertise their items
in a dedicated eBay sellers section of newspaper classifieds. Advertiser support
for this product waned and the service was eliminated. However, the relationship
with eBay provided us an opportunity to enhance our application-programming
interface (API) that allows third parties to access AdStar services. In 2002, we
capitalized on these enhancements by expanding our API business.
AdStar's API business allows third parties to access AdStar's
e-business suite to create ad taking capability for their customers. This is
especially appealing to businesses that support newspapers (e.g., after hour
call centers, software manufacturers providing authoring tools for advertisers,
etc.) and businesses that aggregate advertisers (e.g., niche web sites, software
companies that provide services to auto dealerships or realtors, etc.). In 2002,
we entered into agreement with a number of such organizations including Manheim
Interactive, who provides services to auto dealers, as well as a niche web site
that provides services to commercial real estate brokers and an after hours call
center.
In addition to transitioning to a recurring revenue model and
expanding our newspaper customers, we believe that we are now in a position to
reduce our operating costs on a go forward basis. There can be no assurance that
our new product offerings or the arrangement with Tribune Company will be
successful in generating revenues sufficient to support our operating expenses.
Prior to the development of our Web business, revenues had been
generally sufficient to support our historic business. In developing our
Web-based system we began to incur significant losses that could not be offset
by the revenues generated by our historic business. These expenses caused us to
incur significant losses from 1998 through the first quarter of 2003. Our future
success is dependent upon our ability to substantially grow revenues and control
costs to the point where we can fund the level of operations necessary to serve
the anticipated customer base. To this end, our plans have included expanding
the products and services offered to our customers by building on our
proprietary software processes and unique position within the industry. We feel
that there is significant opportunity to increase revenues by offering the Web
software and services that we had initially developed for ourselves to print
publications as an application service provider ("ASP"). In addition we have
already taken steps to control or in some case reduce costs on an ongoing basis.
The AdStar Software Solution
The new AdStar e-business application suite is an enterprise class,
integrated software solution that allows 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 ASP
product provides our customers an opportunity to generate incremental revenue
from their on-line business while increasing the number of visitors to their Web
site. Our software allows newspapers to turn their on-line presence into an
e-commerce-enabled, revenue generating Web site.
15
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 - This technology is designed for use by the
professional marketplace. Specifically, the applications accept
transmissions from classified advertising agencies and large
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.
o ASP Web site technology - 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 in a secure
infrastructure. 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 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.
16
BonafideClassifieds.com
The Newspaper Association of America (NAA) is the newspaper industry's
trade association representing the $55 billion newspaper industry and over 2,000
publishers in the United States and Canada. In 2002 AdStar entered into an
Agreement with the NAA to allow the NAA to market and private label (operate
under it's name) Advertise123.com, AdStar's one-stop marketplace on the Web for
the general public to buy classified ads. Through this portal, individuals and
businesses can, on a 24/7 basis, 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. In 2003, AdStar expanded its relationship with the
NAA by authorizing the NAA to market a version of AdStar's ASP Web site
technology to its members. AdStar receives set up and transaction fees for these
businesses.
Application Programming Interface (API)
In 2002, AdStar learned that a variety of third parties including call
centers, niche web publishers, auto dealer management businesses and others were
interested in utilizing AdStar technologies to allow their customers, who
advertise with newspapers, the convenience of AdStar services. Third parties are
using AdStar's application programming interface (API) to access AdStar services
so that the customer of the third party can remain within that third parties
application. AdStar's service provides fast and accurate ways for composing,
pricing and delivering ads. For allowing third parties access to AdStar
services, AdStar charges fees based on transaction volume.
Results of Operations
The following table sets forth the results of operations expressed as a
percentage of revenues:
Three months ended
March 31,
------------------
2002 2003
---- ----
ASP, net 33% 55%
Licensing and software 57% 36%
Customization and other 10% 9%
---- ---
Net revenues 100% 100%
Cost of revenues 45% 56%
---- ---
Gross profit 55% 44%
General and administrative expense 94% 49%
Selling and marketing expense 31% 27%
Product maintenance and Development expenses 44% 43%
---- ---
Loss from operations (114)% (75)%
Interest income (expense), net 1% --
---- ---
Loss before taxes (113)% (75)%
Provision for income taxes -- --
---- ---
Net loss (113)% (75)%
==== ===
17
Three month periods ended March 31, 2003 and 2002
Revenues. - Net revenues for the first quarter 2003 increased 19% to
$593,000 compared to first quarter 2002 net revenues of $500,000. Fees from our
ASP product increased 93% to $322,000 during the first quarter 2003 from
$167,000 in the first quarter 2002. Revenue from licensing and software services
decreased 25% during the first quarter 2003 to $216,000 from $286,000 in the
third quarter 2002. Revenues from customization and other non-recurring items
increased 15% during the first quarter 2003 to $55,000 from $48,000 in the first
quarter 2002.
The $156,000 increase in our ASP product revenues is comprised of a
net increase of 5 new customers accounting for approximately $94,000 and an
overall increase in transactions to existing customers resulting in additional
revenues of $62,000 over the first quarter 2002. Included in new customers are 4
existing customers who switched to our ASP product, from licensing our software
, accounting for approximately $73,000 of the increase. As a result of the
election of the 4 customers to convert to the ASP product along with 2
additional customers whose contracts were changed as part of the Tribune
agreement we realized a correlating net $51,000 decrease in licensing and
software services. The remaining $19,000 decrease is primarily due to the
recognition of $12,000 in 10 year software license's renewal fees during the
first quarter of 2002 compared to 0 for the first quarter 2003 and $10,000 as
the result of the discontinuance of 2 fax service contracts during the first
quarter 2003.
We expect that revenue from our ASP Product will continue to increase
as we sign on new and converted customers and a related increase in the
transaction volume we process on behalf of those customers.
Cost of revenues - Cost of revenues consists primarily of the costs to
customize and install the AdStar software applications, configure end-user
software, install Web-based ad-taking software, provide technical customer
training and end-user support, amortization of internally developed application
modules, depreciation of production servers and related software, royalties, and
co-location costs. These costs increased to $335,000 for the first quarter 2003
compared with $226,000 for the first quarter 2002. Our gross profit margin
decreased to 44% during the first quarter 2003 from 55% during the first quarter
2002. The $109,000 increase in cost of revenues primarily resulted from an
increase in the amortization of software development costs and depreciation of
production servers of $59,000 combined with an increase in direct labor costs of
$56,000 in the first quarter 2003 compared to the first quarter 2002. The
increase in amortization is primarily attributable to the commencement of
amortization of the first phase of the CareerBuilder development project in
August 2002 and commencement of amortization of our global infrastructure
enhancement project in the first quarter 2003 along with an increase in
production equipment depreciation relating to the addition of servers and
related peripherals to service anticipated increased web traffic from our ASP
product, commencing in the second and third quarters of 2002.
Given our current level of Web automation, we will be able to manage
significantly greater transaction volumes with limited increases to our current
staffing and equipment levels. Accordingly, we expect a corresponding increase
in cash to be generated from our gross profits as transaction volume increases
in our ASP product.
Selling and marketing expense. - Selling and marketing expense
consists primarily of direct charges for advertising, sales promotion,
marketing, trade shows, customer service, and business development. Selling
expense increased 3% during the first quarter 2003 to $161,000 from $156,000
during the first quarter 2002. The $5,000 increase is primarily the result of
our reconfiguring our
18
technical customer support and non-technical customer support functions as a
result of our continuing transition from a licensing and software enterprise to
an ASP. As a result we incurred additional customer service personnel-related
costs of approximately $15,000 during the first quarter 2003 compared to the
first quarter 2002 offset by a reduction in business development and outside
consulting costs of $17,000 as a result of converting the arrangement to a
$100,000 annual guaranteed cost plus commissions compared to a fixed annual cost
of $150,000 during 2002.
In future quarters, we can expect to see some incremental increase in
selling expenses as compared to the related periods of 2002 as we continue the
development and implementation of our strategic marketing plan and continue to
build upon our existing relationships with Tribune Company, Knight-Ridder, Inc.,
CareerBuilder, L.L.C., Manheim Interactive, Inc. and other potential strategic
partners.
General and administrative expenses. - General and administrative
expense consists primarily of the cost of executive, administrative, accounting,
finance, and personnel along with professional fees and public company related
expenses. General and administrative expenses decreased 39% during the first
quarter 2003 to $289,000 from $470,000 during the first quarter 2002. The
$181,000 decrease was primarily related to the reduction in legal and accounting
fees of $111,000, a reduction $33,000 in vendor stock compensation relating to
business development and investor relations, a net reduction in personnel costs
of $25,000 as a result of our repositioning of personnel, a reduction of $21,000
in financing fees associated with the terminated line-of-credit, offset by an
increase of $15,000 in shareholder relations cost. The reduction in professional
and financing fees is the result of the aforementioned cost cutting measures.
Management believes that our existing executive and administrative
personnel are sufficient to allow for significant growth without having to add
significant additional systems or personnel related costs.
Product maintenance and development expenses. - Product maintenance
and development expenses consist of expenses to identify functional
requirements, to plan, identify and conceptually design and test the required
technical infrastructure, and to perform software and Web-site maintenance, and
other general routine fixes. The costs consist primarily of personnel related
expenses for technical and design personnel, equipment maintenance and outside
consultants. Development expense for the first quarter 2003 increased 15% to
$253,000 from $220,000 for the first quarter 2002. The $33,000 increase is
primarily related to an increase personnel costs as a result of an overall
increase in technical employees compared to the first quarter 2002.
Liquidity and Capital Resources
As of March 31, 2003, we had cash and cash equivalents of
approximately $1,151,000 and restricted cash of $175,000. Net cash used in
operations was approximately $69,000 for the three months ending March 31, 2003
compared with $417,000 for the comparable 2002 period. The $348,000 improvement
was primarily related to cost cutting measures which began in July 2002 when 3
executives agreed to reduced salaries and in December 2002 when we negotiated
lower legal and accounting fees, medical insurance, credit card processing and
merchant bank fees, and formalized a plan to close the New York office. In
addition in the first quarter of 2002 we incurred higher costs to identify
functional requirements, plan, identify and conceptually design the required
technical infrastructure of the first phase of the CareerBuilder development
project as compared to 2003 where we are currently capitalizing costs on the
CareerBuilder development project.
19
Net cash used in investing activities increased to $249,000 for the
three months ended March 31, 2003 compared with $85,000 in the same period in
2002. The $164,000 increase is a result of a $155,000 increase in software
capitalized, primarily on the CareerBuilder project, compared to the prior year.
Net cash provided by financing activities decreased to $528,000 for the three
months ended March 31, 2003 compared with $1,940,000 in the same period in 2002.
The decrease is primarily due to the reduction in sales of common and preferred
stock with net proceeds of $1,782,000 from the issuance of Series A preferred
stock to Tribune Company and net proceeds of $157,000 from the sale of common
stock in a private placement during the first quarter of 2002 compared with the
issuance of Series B-2 preferred stock to Tribune Company with net proceeds of
$535,000 during the first quarter of 2003.
As a result of the equity raised during the first quarter 2003 from
Tribune Company, we expect our available funds, combined with cash generated
from existing operations, new customers, adjunct services now offered to
existing customers, the flexibility to cut back our work-force should
anticipated significant customization projects be delayed or terminated, and
managements historical ability to obtain bridge financing, if necessary, will be
sufficient to meet our anticipated working capital needs through March 31, 2004.
We have generated operating losses during the past four years, and we cannot
guarantee that the anticipated increases in revenue will occur in a timely
manner, that we will be able to contain our costs in accordance with our plans,
that we have accurately estimated the resources required to fulfill our
obligations to Tribune Company, or that we will be able to secure adequate funds
through financing arrangements at amounts or terms that would facilitate the
Company's cash requirements. Although we are optimistic that our 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.
Our accounts payable have increased because of the growth of our
Web-based business. As part of this business, we process credit card related
transactions on behalf of our customers, without charge. Currently, we process
Web-based credit card ads for approximately 12 metropolitan newspapers. In that
regard, we generally collect cash throughout a given month and upon final
reconciliation transfer the collections, net of our fees for Web-based
transactions, to the respective newspapers, generally within 30 to 35 days after
month end. As our customers have realized greater ad volume and, in some
instances, have increased the price charged per ad to the end user, our
liability to them and the related cash amounts collected have correspondingly
increased. In addition, we generally follow the seasonality of the classified
industry where ad volume increases monthly throughout the calendar year and then
declines significantly in the fourth quarter.
In August 2002, Chase Merchant Services, L.L.C (Chase), a merchant
bank that provides credit card processing services for us, informed us that it
is requiring us 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 our transactions during the second quarter 2002. As a result,
in November 2002 we entered into a new arrangement with another merchant banker
in which the terms and conditions do not require that we maintain a reserve and
subsequently terminated the contract with Chase on April 30, 2003. Chase has
since returned $155,000 to us with the remaining $20,000 held by them in reserve
for up to six months.
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 cash provided from operations be insufficient to support the ongoing
operations of the business or should we determine that additional product
enhancements not currently contemplated are warranted to secure or retain market
share. Adequate funds 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.
20
Item 3. 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 three month period ended March 31,
2003, 69,145 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 $53,750. The vendors have taken the
shares for investment.
In December 2002 the Board of Directors approved the sale of shares of
its Series B Preferred Stock to Tribune Company for an aggregate price of $1.5
million. The sale was split into two funding segments:
(i) In December 2002, AdStar sold 1,200,000 shares of its Series B-1
Preferred Stock to Tribune Company for an aggregate purchase price of $900,000.
These shares currently convert on a 1:1 basis. Shareholders of Series B-1
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 B-1 Preferred Stock are entitled to one vote for each share; and
(ii) In March 2003, AdStar sold 800,000 shares of its Series B-2
Preferred Stock to Tribune Company for an aggregate purchase price of $600,000.
These shares currently convert on a 1:1 basis. Shareholders of Series B-2
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 B-2 Preferred Stock are entitled to one vote for each share. In
addition, on March 28, 2003, in exchange for all of the Series B-1 Preferred
Stock plus accrued and unpaid dividends on those shares, issued in December 2002
to Tribune Company, AdStar issued an additional 1,200,000 shares of its Series
B-2 Preferred Stock to the Tribune Company.
These sales were exempt from registration, as it was a nonpublic
offering, made pursuant to Sections 4(2) and 4(6) of the Act.
21
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.
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 May 15, 2003 /s/ Leslie Bernhard
----------------------------
President & CEO
Date May 15, 2003 /s/ Anthony J. Fidaleo
----------------------------
Chief Financial Officer
22
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: May 15, 2003
/s/ Leslie Bernhard
--------------------------------
Leslie Bernhard
Chief Executive Officer
23
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: May 15, 2003
/s/ Anthony J. Fidaleo
--------------------------------
Anthony J. Fidaleo
Chief Financial Officer
24