-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VTRqVbpc1CGksV0wct3DE3nMEdfeZtIZy43e7kyIdpMPiHiMLuh1sooOOHnVCxEI O6o1tQxlP37L0sXcLWk03g== 0001169232-03-003820.txt : 20030515 0001169232-03-003820.hdr.sgml : 20030515 20030515164110 ACCESSION NUMBER: 0001169232-03-003820 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADSTAR COM INC CENTRAL INDEX KEY: 0001091599 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 223666899 STATE OF INCORPORATION: DE FISCAL YEAR END: 1230 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-15363 FILM NUMBER: 03705500 BUSINESS ADDRESS: STREET 1: 4553 GLENCO AVENUE STREET 2: SUITE 325 CITY: MARINA DEL RAY STATE: CA ZIP: 90292 MAIL ADDRESS: STREET 1: 4553 GLENCO AVENUE STREET 2: SUITE 325 CITY: MARINA DEL REY STATE: CA ZIP: 90292 10QSB 1 d55805_10qsb.txt FORM 10-QSB 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 EX-99.1 3 d55805_99-1.txt CERTIFICATION Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of AdStar, Inc. (the "Company") on Form 10-QSB for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Leslie Bernhard, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Leslie Bernhard - --------------------------------- Leslie Bernhard Chief Executive Officer May 15, 2003 EX-99.2 4 d55805_ex99-2.txt CERTIFICATION Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of AdStar, Inc. (the "Company") on Form 10-QSB for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Anthony J. Fidaleo, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Anthony J. Fidaleo - --------------------------------- Anthony J. Fidaleo Chief Financial Officer May 15, 2003 -----END PRIVACY-ENHANCED MESSAGE-----