U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the period ended June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 33-90672
THE ADSONLY GROUP, INC.
(Name of small business issuer in its charter)
California 93-1026060
(State or other jurisdiction of
incorporation or organization) (IRS Employer ID No.)
2269 Chestnut St., Suite 637
San Francisco, California 94123
(Address of principal executive offices)
Registrant's telephone number including area code (415) 457-7586
Indicate by check mark whether the registrant (1) has filed reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
As of June 30, 1996 - 2,006,864 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
PART I - Financial Information
Item 1. Financial Statements
INDEX TO FINANCIAL STATEMENTS
Page
Balance Sheets ............................................................F-2
Statements of Operations ...................................................F-3
Statements of Stockholders' Equity .........................................F-4
Statements of Cash Flows ..................................................F-5
Notes to Financial Statements ..............................................F-6
F-1
<PAGE>
THE ADSONLY GROUP, INC.
(A Development Stage Enterprise)
Balance Sheets
<TABLE>
<S> <C> <C>
December 31, 1995 June 30, 1996
----------------------- ------------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash $ 47,698 28,646
Federal income tax receivable 22 22
----------------------- ------------------
Total current assets 47,720 28,668
----------------------- ------------------
FIXED ASSETS
Computer equipment 1,983 1,983
Less: accumulated depreciation (430) (628)
----------------------- ------------------
Total fixed assets 1,553 1,355
----------------------- ------------------
OTHER ASSETS
Deferred income tax asset (note 3) 0 0
----------------------- ------------------
Total other assets 0 0
----------------------- ------------------
Total Assets $ 49,273 30,023
======================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 1,816 923
State franchise tax payable 800 0
State sales tax payable 511 511
----------------------- ------------------
Total current liabilities 3,127 1,434
----------------------- ------------------
LONG-TERM LIABILITIES
Notes payable (note 1a) 8,842 8,842
----------------------- ------------------
Total long-term liabilities 8,842 8,842
----------------------- ------------------
Total Liabilities 11,969 10,276
----------------------- ------------------
STOCKHOLDERS' EQUITY
Common stock, no par value, authorized 5,000,000
shares; 2,006,864 issued and outstanding. (note 5) 279,005 279,005
Preferred stock, no par value, authorized 1,000,000
shares; 0 shares issued and outstanding. (note 4) 0 0
Deficit accumulated during the development stage (241,701) (259,258)
----------------------- ------------------
Total Stockholders' Equity 37,304 19,747
----------------------- ------------------
Total Liabilities and Stockholders' Equity $ 49,273 30,023
======================= ==================
</TABLE>
The accompanying notes are an integral part of the financial statements
F-2
<PAGE>
THE ADSONLY GROUP, INC.
(A Development Stage Enterprise)
Statements of Operations
(Unaudited)
<TABLE>
<S> <C> <C> <C>
Period from
April 6, 1990
6 Months ended June 30, (Inception) to
1995 1996 June 30, 1996
REVENUE
Sales $ 0 0 6,813
Interest 0 0 413
-------------- ------------- -----------------
Total revenue 0 0 7,226
-------------- ------------- -----------------
COST OF SALES
Cost of sales 0 0 6,823
-------------- ------------- -----------------
Gross profit/(loss) 0 0 403
EXPENSES
Bank charges 13 0 493
Concept development cost 0 0 120,000
Contract labor 9,156 10,981 55,224
Depreciation 198 198 628
Dues and subscriptions 400 0 507
Franchise offering document preparation 0 0 5,955
State franchise filing fee 487 1,260 3,697
Internet site fee 0 2,450 2,450
Licenses and taxes 0 0 6,234
Office expenses 1,250 864 10,027
Postage 552 12 2,187
Printing 2 0 2,188
Professional Services 12,866 0 45,406
Travel and entertainment 250 1,792 4,289
Miscellaneous 0 0 376
-------------- ------------- -----------------
Total expenses 25,174 17,557 259,661
-------------- ------------- -----------------
Net loss before tax benefit (25,174) (17,557) (259,258)
-------------- ------------- -----------------
Income tax benefit (note 3) 0 0 0
-------------- ------------- -----------------
Net loss $ (25,174) (17,557) (259,258)
============== ============= =================
Weighted average number of shares outstanding 2,006,684 2,006,684 2,006,684
============== ============= =================
Net loss per share $ (0.01) (0.01) (0.13)
============== ============= =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
THE ADSONLY GROUP, INC.
(A Development Stage Enterprise)
Statement of Stockholder's Equity
<TABLE>
<S> <C> <C> <C> <C> <C>
Shares of Total
Common Common Preferred Accumulated Stockholders'
Stock Stock Stock Deficit Equity
BALANCE, December 31, 1995 2,006,864 $ 279,005 0 (241,701) 37,304
Net loss 0 0 0 (17,557) (17,557)
------------- ------------- ------------- ------------------ ------------------
BALANCE, June 30,
1996 (Unaudited) 2,006,864 $ 279,005 0 (259,258) 19,747
============= ============= ============= ================== ==================
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
THE ADSONLY GROUP, INC.
(A Development Stage Enterprise)
Statements of Cash Flows
(Unaudited)
<TABLE>
<S> <C> <C> <C>
Period from
April 6, 1990
6 Months ended June 30, (Inception) to
1995 1996 June 30, 1996
------------------- ---------------- -------------
CASH FLOWS FROM DEVELOPMENT ACTIVITIES:
Net loss $ (25,174) (17,557) (259,258)
Adjustments to reconcile net loss to net cash used for
development activities:
Stock issued for concept development costs 0 0 120,000
Depreciation 198 198 628
Changes in operating assets and liabilities:
Increase (decrease) in accounts payable (698) (1,693) 1,434
(Increase) decrease in receivable 0 0 (22)
-------------- -------------- -------------
Net cash used for development activities (25,674) (19,052) (137,218)
-------------- -------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets 0 0 (1,983)
-------------- -------------- -------------
Net cash provided by investing activities 0 0 (1,983)
-------------- -------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued for cash 0 0 84,020
Cash contributed by existing stockholders 74,985 0 74,985
Cash received for notes payable 0 0 8,842
-------------- -------------- -------------
Net cash provided by financing activities 74,985 0 167,847
-------------- -------------- -------------
Increase (decrease) increase in cash 49,311 (19,052) 28,646
-------------- -------------- -------------
CASH, beginning of period 8,617 47,698 0
-------------- -------------- -------------
CASH, end of period $ 57,928 28,646 28,646
============== ============== =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid in cash $ 0 0 0
============== ============== =============
Stock issued for intangible asset $ 0 0 120,000
============== ============== =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
THE ADSONLY GROUP, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
(Unaudited)
(1) Summary of significant accounting policies
The Company The AdsOnly Group, Inc. is a California chartered development
stage corporation which conducts business from its headquarters in San
Francisco. It was incorporated on April 6, 1990.
The financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the
dates of the statements of financial condition and revenues and
expenses for the years then ended. Actual results could differ
significantly from those estimates. Material estimates that are
particularly susceptible to significant change in the near-term relate
to the book-tax difference of accounting for the development expenses
(see note 3 ). The financial statements for the six months ended June
30, 1995 and 1996 include all adjustments which in the opinion of
management are necessary for fair presentation. The following summarize
the more significant accounting and reporting policies and practices of
the Company:
a) Fixed assets Fixed asset are recorded at cost.Depreciation is computed
by the straight-line method over the estimated useful lives of the
assets, generally five or seven years. Expenditures for maintenance and
repairs are charged to operations as incurred. Depreciation was $198
for each of the six month periods ended June 30, 1995 and 1996.
b) Notes payable The Company issued notes payable to two principal
stockholders in exchange for cash. These notes carry no stated interest
rate or maturity date.
c) Net loss per share Net loss per share is computed by dividing the net
loss by the number of shares outstanding during the period.
d) Concept development At inception the Company exchanged common stock
for $120,000 of concept development costs previously expended by two
individuals previously unrelated to the founders of the Company. The
Company chose to immediately expense these costs.
(2) Franchise offering document expenses The franchise offering document
expenses pertain exclusively to the development of the Uniform
Franchise Offering Circular, (UFOC), which represents the bulk of the
Company's near-term future marketing efforts and revenues. SFAS 2
requires that all generated development costs be charged to expense
when incurred. Accordingly, the Company has expenses the costs to
develop its UFOC.
(3) Franchise revenues The Company has not as yet received any franchise fee
revenues, but it expects to record such revenue in accordance with SFAS
45.
(4) Income taxes The Company recorded the franchise offering document costs as
expenses in the period when incurred for financial statement purposes,
per note 2 above. The Company recorded the concept development costs as
expense immediately as well, per note 1b above. However, for income tax
purposes, these costs were recorded as an intangible asset to be amort-
ized over future years. The primary purpose for this treatment for tax
purposes is to retain the tax benefit of the development costs.
California tax law did not then recognize operating loss carry-forwards
as the Federal tax code does. Therefore, by capitalizing and amortizing
these costs the tax benefit of these expenses is retained for state tax
purposes rather than being lost forever, as immediate expensing would
have caused. This treatment will require a longer time before the tax
benefit of the costs is realized, but will increase the tax benefit
realized over time. California tax law was changed for tax years begin-
ning after January 1, 1994. It now recognizes net operating loss carry-
forwards on the same basis as the federal tax code.
F-6
<PAGE>
THE ADSONLY GROUP, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
(4) Income taxes, continued The amounts recorded as deferred income tax assets
at June 30, 1995 and 1996, $92,200 and $103,700 respectively, represent
the amount of tax benefit of loss carry-forwards.The Company has estab-
lished a $103,700 valuation allowance against this asset as the Company
has no history of profitable operations. At June 30, 1996, the Company
has a net operating loss carry-forward for income tax purposes of
approximately $259,258, expiring as follows: $126,490 in 2005, $6,891
in 2006, $2,921 in 2007, $45,483 in 2008, $23,513 in 2009, $36,403 in
2010 and $17,557 in 2011.
(5) Stockholders' equity The Company has authorized 5,000,000 shares of no par
value common stock and 1,000,000 shares of no par preferred stock. In
April 1990 the Company issued 1,550,000 shares of common stock in exch-
ange for $3,900 in cash and $120,000 of previously expended concept
development costs. In May 1993, the Company issued 273,530 shares of
common stock in exchange for $29,970 in cash. In November 1993, the
Company issued 150,000 shares of common stock in exchange for $150 in
cash. In February 1994, the Company issued 33,334 shares of common
stock in exchange for $50,000 in cash. In May 1995, and June 1995,
existing stockholders contributed $50,000 and $24,985 in cash to the
Company.
(6) Common stock public offering The board of directors authorized the
Company to sell up to 850,000 shares of the Company's common stock in a
"self-underwritten" public offering pursuant to a Registration
Statement on Form SB-2 under the Securities Act of 1933. This offering
is being made with a 50,000 share minimum, and is effective for one
year from the effective date of the registration, June 26, 1996.
(7) Subsequent events In December 1996, the Company completed the sale of the
minimum shares under its registration, and therefore broke its escrow.
The Company is proceeding with the continued sale of its shares.
F-7
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation.
The AdsOnly Group is a start-up company offering advertising franchise
opportunities for sale on a national basis. The Company has been in an
organizational and development stage since 1990, during which time management
has incorporated the Company, filed for and completed franchise registration and
concentrated its efforts with the legal and logistical issues involved in
preparing to sell franchise offerings of a service-based enterprise.
AOG is currently operating on a part-time basis until such time that
funding can be raised to allow the officers to devote full-time efforts in
advancing this enterprise. At this time, management is working without
compensation. AOG will not commence full-time operations until such time as at
least the minimum number of shares are sold and the proceeds of this offering
become available. The Company currently has eight part-time employees and no
full-time employees, however, once the Offering is completed all of the
part-time employees will become full-time employees. The Company also expects to
hire an additional three to twelve employees for its administrative staff in the
first year.
The Company has set aside $75,740 under the minimum Use of Proceeds of
the Offering for the payment of salaries to employees. Although this is a
significant amount of the minimum proceeds, the Company feels that this will be
sufficient to cover the salary expense of its employees for the first year of
operation while not negatively impacting the liquidity of the Company. AOG
currently has sufficient employees to operate the company for the first 12
months, however, if amounts greater than the minimum proceeds are raised
proportionally up to the maximum amount to be set aside for salaries of
$941,740, the Company will hire additional employees to expand its operations
and expansion, however not to the degree that the amount of employees are more
than can be supported for one year under the amount of proceeds raised and set
aside for salaries from the Offering. Any addition of employees and increased
operations would also be expected to accordingly allow the AOG to increase its
revenues and thus gain an even greater liquidity.
Should only the minimum sale of shares offered be sold management
believes that it would meet the Company's minimum cash requirements until such
time as AOG's operations begin generating revenues. Management believes it may
not be necessary to seek additional funding during the twelve-month period after
receipt of at least the minimum amount of proceeds which will be made become
available to AOG as the Company expects to be generating revenues prior to the
end of the 12th month of operation after funding.
AOG intends to secure additional operating and training facilities to
its main office in San Francisco. AOG intents to secure operating facilities in
the San Francisco area. Management anticipates that this base of operations will
demonstrate a real world example of "the virtual office" rather than a large
physical plant associated with past agencies. Should adequate funding be
available, AOG plans to employee additional key personnel to proceed with the
Company's franchise sales effort and commence with the design and development of
the communication network/computer system, necessary to organize the sales and
marketing effort, as well as future franchise communications.
AOG intends to contract with a leading public relations firm to begin
the process of promoting its franchise business and operations. Initially,
management intends to orchestrate an extensive awareness campaign to generate
interest and leads, on a market-by-market basis, just prior to conducting a
sales blitz in that area. As part of its marketing and public relations
strategy, management plans to solicit press coverage, personal interviews, trade
articles and industry related forums that will further promote the Company in
its operations. Management intends to target publications, trade journals, and
other communication vehicles geared to the advertising industry in conjunction
with its planned self-promotional advertising campaign.
In keeping with a technologically-based, information-sharing concept,
management feels that the implementation of computer systems and the training of
new franchisees in their use will be an important part of a successful approach
to the establishment of any communication based service industry such as
advertising. Therefore, as soon as capitalization allows, one of the Company's
first organizational plans will be to implement the use of a LAN/WAN computer
system to connect AOG's home office with its franchisees. The system AOG intends
to install will be a custom designed database/network utilizing the Apple
Computer platform. Management believes this system will allow for the
collection, archiving, and exchange of advertising ideas and products produced
and digitally stored within AOG's system database. It is this system which plans
to make available for its franchisees that is intended to offer
9
<PAGE>
the communication, knowledge, and support that are often only available from a
large national advertising agency. This network, referred to by AOG as the "CET"
(Creative Exchange Technology) system, will also allow the Company to monitor
individual franchise sales and operational activities as well as reaction to
needs and demands in real-time, as needed. In addition, management believes this
ability to share ideas and information will be a distinct competitive advantage
and marketing tool to be used for AOG's franchisees seeking market-by-market
data, creative and other operational support.
The interactive capabilities of the CET system will also allow for
digital creative exchanges, while allowing The AdsOnly Group and franchisees to:
communicate at will with text and graphics, retrieve text and graphics from an
advertisement database, allow remote brain-storming sessions, conduct on-line
research, as well as access existing mainstream on-line services.
Management intends, due to practical reasons and the size of its
potential national market, to concentrate its initial franchising efforts in the
California area markets. These first few franchises will then be able to serve
both as examples to new franchisees, as well as franchisee training centers and
beta test sites for franchised system development.
Management intends to complete production of AdsOnly marketing and
sales tools, which will include a franchise sales brochure with an interactive
computer disk and the AdsOnly Video(TM), targeted trade, direct mail and
specialized business-to-business advertising campaigns. The AdsOnly Video will
be produced by AOG on a quarterly basis for use as a communication and sales
tool. Parts of the video will be used to update franchisees of current events,
trends campaign, and issues concerning the AdsOnly franchise and the advertising
industry. The AdsOnly Video will be regularly updated for show as demo reels,
highlighting the best work for that quarter with case study examples. An initial
"working model" of this video will be produced for the purpose of introducing
prospective franchisees to the AOG concept and to be supplied as a leave behind
sales tool.
Simultaneously, AOG intends to complete the production of the AdsOnly
Franchise Business and Marketing Manual, which is currently in draft form. Items
outlined will include detailed education of the franchisee and their employees;
pre-opening activities; agency advertising and promotion; professional systems;
administrative systems; and professional support. Additionally, management
intends to re-create all existing franchise advertising and direct mail programs
in customizable electronics format for use within the CET system.
Management is currently developing specific training tools designed to
teach new franchisees the operational systems of the AdsOnly franchise package,
including the nut-and-bolts of opening, promoting and maintaining their AdsOnly
office, and running it profitably. This training will be conducted in both
classroom sessions prior to opening a franchise as well as through self-paced
computer based training that will also instruct the operators on how to use the
CET system. This coursework and corresponding instruction tools will be
copyright protected to protect investor interests in AOG. Management intends to
hold bi-annual training seminars held in conjunction with national sales
conferences that AdsOnly franchises will be obligated to attend or be
represented at. Future continuing education for franchisees is planned to be
implemented using on line programs developed by the Company.
AOG intends to form relationships between its management and their past
associations in the advertising industry by establishing strategic alliances
that can be used to benefit the organization as a whole. These strategic
alliance candidates include: The American Association of Advertising Agencies
("AAAA"), The National Ad Council, Direct Marketing Association ("DMA"), Media
Buying Services, and the National Association of Franchises.
As a result of these alliances, AOG hopes to be able to negotiate
blanket discounts, wholesale buying arrangements and group rates that can be
passed on throughout the AdsOnly network. Management believes that this ability
to leverage the Company's mass marketing approach will enable AOG to create a
stronger competitive advantage for the entire AOG organization allowing each
franchisee to offer prices and service that individual agencies would not be
able. While larger agencies are able to offer services in similar ways to larger
budget clients, AOG's ability to offer boutique style creative support with
competitive prices could position AdsOnly franchisees to compete for clients
against agencies of all sizes.
10
<PAGE>
Management anticipates that by the end of the first year of operation,
AOG will have completed all franchise development, systems and operational
issues both at the corporate level and at the franchise level. AOG projects this
length of time to completely "field test" the AOG franchise concept, allow for
the sale and training of the first franchises, and modifications to the
operating systems for the organization.
While systems and communication tools are the tangible aspects of what
the AdsOnly franchise consists of, the Company feels that there is a significant
"intangible" benefit to the business AOG offers. For small local agencies, and
for that matter, people that would like to leave a large shop to "go it alone",
there is the isolation factor present in any single start-up business that can
impede an individual's ability to compete. Management believes that AdsOnly's
ability to create and support a growing network of franchise agencies around the
country that will create an organizational network to supply the type of support
that can be extremely beneficial in the early stages of a business. The ability
of franchisees to network, share ideas, research industries and draw on inside
knowledge from within the AdsOnly organization and its database will be able to
allow the individual franchisees to have a much greater advantage as far as
competitiveness and support.
Franchising
In July of 1993, AOG began the preparation of its franchise
registration documents including a Uniform Franchise Offering Circular (UFOC)
for submission to the Federal Trade Commission which has now been completed. The
Company has also began preparing and submitting the required registration
materials to be allowed to sell franchises in approximately thirty states which
the Company has targeted to begin its marketing. The Company expects to be
registered with all the states that it has initially targeted within several
months after the completion of the offering.
AOG intends to sell franchises for an initial non-refundable franchise
fee of $19,500, for which AOG intends to provide a franchisee with assistance in
establishing the franchise location, assistance pursuant to operating the
franchise, legal and accounting work, and training expenses. AOG intends to
train each franchise owner in AOG's advertising business operating systems.
Franchisees will be required to pay AOG a monthly royalty fee equal to
five percent (5) of the monthly sales. Franchisees will also pay AOG a national
advertising fee equal to one and a half percent (1 1/2) of monthly gross sales.
These fees will be used to purchase regional advertising to benefit franchisees
as well as AOG.
Franchisees will be responsible for obtaining all zoning permits,
licensing and variances which may be required to open and operate a franchise
location. AOG will require all of its franchisees to sign strict confidentiality
and non- disclosure agreements pursuant to the trade secrets disclosed to
franchisees in order for them to operate franchise locations.
PART II - Other Information
Item 1. Legal Proceedings.
The Company is not a party to any pending legal proceedings.
Item 2. Changes in Securities
None to report.
Item 3. Defaults Upon Senior Securities
None to report.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company did not submit any matters to a vote of security holders during the
last quarter.
11
<PAGE>
Item 5. Other Information
None to report.
Item 6. Exhibits and Reports on Form 8-K and 8-K/A.
During the last quarter the Company did not file any reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: January 27, 1996
THE ADSONLY GROUP, INC.
a California Corporation
By: /s/ Michael Hinshaw
Michael Hinshaw
CEO and Chairman of the Board
By: /s/ Henry L. Corona
Henry L. Corona
Chief Financial Officer
12
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