10QSB 1 form10qsb093001.txt [As adopted in Release No. 34-32231, April 28, 1993, 58 F.R. 26509] U.S. Securities and Exchange Commission Washington, D.C. 20549 Form 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: September 30, 2001 ------------------------------------- [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from to ----------------- --------------- Commission file number 0-18834 ------------------------------------ Klever Marketing, Inc. -------------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) Delaware 36-3688583 ------------------------------------------------------------------------------- (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 350 West 300 South, Suite 201, Salt Lake City, Utah 84101 (Address of principal executive offices) (801) 322-1221 Issuer's telephone number (Former name, former address and former fiscal year, if changed since last report.) 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 APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING DURING THE PRECEDING FIVE YEARS Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes X No APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practical date: September 30, 2001 12,067,759 Transitional Small Business Disclosure Format (check one). Yes ; No X ---- ----- PART I Item 1. Financial Statements INDEPENDENT ACCOUNTANT'S REPORT Klever Marketing, Inc. We have reviewed the accompanying balance sheets of Klever Marketing, Inc. as of September 30, 2001 and December 31, 2000, and the related statements of operations for the three and nine months ended September 30, 2001 and 2000, and cash flows for the nine month periods ended September 30, 2001 and 2000. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statement taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with generally accepted accounting principles. Respectfully submitted /S/ ROBISON, HILL & CO. Certified Public Accountants Salt Lake City, Utah November 9, 2001 3 KLEVER MARKETING, INC. BALANCE SHEETS September 30, December 31, ----------- ----------- ASSETS ................................... 2001 2000 ----------- ----------- Current Assets Cash ................................... $ 19,916 $ 2,870 Accounts Receivable .................... 513 8,631 Prepaid Expenses ....................... 7,170 5,000 Related Party Receivables .............. 7,964 103,854 Other Assets ........................... 80,975 92,339 ----------- ----------- Total Current Assets ................ 116,538 212,694 ----------- ----------- Fixed Assets Office Equipment ....................... 162,578 155,298 Phase 2 Equipment ...................... 66,690 -- Less Accumulated Depreciation .......... (101,068) (78,663) ----------- ----------- Net Fixed Assets .................... 128,200 76,635 ----------- ----------- Other Assets Patents ................................ 2,293,255 2,247,153 Less Accumulated Amortization .......... (1,637,740) (1,477,349) ----------- ----------- Net Other Assets .................... 655,515 769,804 ----------- ----------- Total Assets ........................ $ 900,253 $ 1,059,133 =========== =========== 4 KLEVER MARKETING, INC. BALANCE SHEETS (Continued)

September 30, December 31, ------------ ------------ 2001 2000 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts Payable, Trade .................................. $ 340,650 $ 192,510 Accrued Liabilities ...................................... 274,802 166,078 Related Party Payables ................................... 2,253,192 1,228,750 Short-term Notes Payable ................................. 5,569 8,478 ------------ ------------ Total Current Liabilities ............................. 2,874,213 1,595,816 Non-Current Liabilities Lease Obligation Payable ................................. 7,183 9,057 ------------ ------------ Total Liabilities ..................................... 2,881,396 1,604,873 ------------ ------------ Stockholders' Equity Preferred stock (Par Value $.01), 2,000,000 shares authorized. 168,434 shares issued and outstanding September 30, 2001 and 94,191 issued and outstanding December 31, 2000 .......................... 1,684 942 Common Stock (Par Value $.01), 20,000,000 shares authorized. 12,067,759 shares issued and outstanding September 30, 2001 and 12,152,768 shares issued and outstanding December 31, 2000 ...................................... 120,678 121,528 Common Stock to be issued ................................ 4,356 4,356 Paid in Capital in Excess of Par Value ................... 11,947,084 11,546,459 Retained Deficit ......................................... (14,054,945) (12,219,025) ------------ ------------ Total Stockholders' Equity ............................ (1,981,143) (545,740) ------------ ------------ Total Liabilities and Stockholders' Equity ............ $ 900,253 $ 1,059,133 ============ ============

See accompanying notes and accountants' report. 5 KLEVER MARKETING, INC. STATEMENTS OF OPERATIONS

For the Three Months For the Nine Months Ended September 30, Ended September 30, ----------------------------- ------------------------------- 2001 2000 2001 2000 -------------- ------------- --------------- -------------- Revenue $ - $ 20,495 $ - $ 20,495 -------------- ------------- --------------- -------------- Expenses Sales and Marketing 130 - 33,197 - General and Administrative 381,326 587,537 1,310,744 2,077,036 Research and Development 53,456 45,542 359,046 216,438 -------------- ------------- --------------- -------------- Total Expenses 434,912 633,079 1,702,987 2,293,474 -------------- ------------- --------------- -------------- Other Income (Expense) Interest Income 651 7,883 4,504 8,074 Interest Expense (58,665) (19,462) (137,437) (41,005) Gain/Loss - - - 193,677 -------------- ------------- --------------- -------------- Total Other Income (Expense) (58,014) (11,579) (132,933) 160,746 -------------- ------------- --------------- -------------- Loss Before Taxes (492,926) (624,163) (1,835,920) (2,112,233) Income Taxes - - - - -------------- ------------- --------------- -------------- Net Loss After Taxes $ (492,926) $ (624,163)$ (1,835,920) $ (2,112,233) ============== ============= =============== ============== Weighted Average Shares Outstanding 12,100,249 12,039,128 12,098,700 12,024,802 ============== ============= =============== ============== Loss per Common Share $ (0.04) $ (0.05) $ (0.15) $ (0.18) ============== ============= =============== ==============

See accompanying notes and accountants' report. 6 KLEVER MARKETING, INC. STATEMENT OF CASH FLOWS For the Nine Months Ended September 30, -------------------------- 2001 2000 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss ......................................... $(1,835,920) $(2,112,233) Adjustments used to reconcile net loss to net cash provided by (used in) operating activities: Stock issued for commissions ..................... 15,000 604,283 (Increase) decrease in: inventory .................................... -- (80,975) accounts receivable .......................... 8,118 (19,696) related party receivables .................... (2,486) (104,029) prepaid expense & other assets ............... 9,194 -- Increase (decrease) in: accounts payable .............................. 148,140 (200,290) accrued liabilities ........................... 108,724 (339,015) lease obligation .............................. (4,783) (851) related party payables ........................ 74,442 952,500 Depreciation and Amortization .................... 182,797 174,116 ----------- ----------- Net cash used in operating activities ............ (1,296,774) (1,126,190) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of equipment ......................... (73,970) (891,633) Acquisition of patents ........................... (46,102) (31,538) ----------- ----------- Net cash used by investing activities ............ (120,072) (923,171) ----------- ----------- 7 KLEVER MARKETING, INC. STATEMENT OF CASH FLOWS (Continued) For the Nine Months Ended September 30, -------------------------- 2001 2000 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from capital stock ....................... $ 483,892 $ 2,245,813 Proceeds from shareholder loans ................... 1,240,000 -- Conversion of note payable to preferred stock ..... (290,000) -- ----------- ----------- Net Cash Provided by Financing Activities ........ 1,433,892 2,245,813 ----------- ----------- Net Increase (Decrease) in Cash and Cash Equivalents ..................... 17,046 196,452 Cash and Cash Equivalents at Beginning of the Period ........................ 2,870 203,232 ----------- ----------- Cash and Cash Equivalents at End of the Period .............................. $ 19,916 $ 399,684 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest .......................................... $ 137,437 $ 41,005 Income Taxes ...................................... $ -- $ -- See accompanying notes and accountants' report. 8 KLEVER MARKETING, INC. NOTES TO FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 NOTE 1 - ORGANIZATION AND SUMMARY OF ACCOUNTING POLICIES This summary of accounting policies for Klever Marketing, Inc. is presented to assist in understanding the Company's financial statements. The accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements. The unaudited financial statements as of September 30, 2001 and for the three and nine months then ended reflect, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to fairly state the financial position and results of operations for the three and nine months. Operating results for interim periods are not necessarily indicative of the results which can be expected for full years. Organization and Basis of Presentation The Company was organized under the laws of the State of Delaware in December 1989. The Company was in the Development stage from 1989 to 1991. The Company was an operating company from 1992 to December 8, 1993 when it filed petitions for relief under Chapter 11 bankruptcy. The Company was inactive until July 5, 1996 when the Company merged with Klever Kart, Inc. in a reverse merger and changed its name to Klever Marketing, Inc. The company was in the development stage until June 30, 1998. Nature of Business The Company was formed for the purpose of creating a vehicle to obtain capital, to file and acquire patents, to seek out, investigate, develop, manufacture and market electronic in-store advertising, directory and coupon services which have potential for profit. The Company is currently in the process of the commercialization of the patented process it has acquired. Cash Equivalents For the purpose of reporting cash flows, the Company considers all highly liquid debt instruments purchased with maturity of three months or less to be cash equivalents to the extent the funds are not being held for investment purposes. Pervasiveness 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 9 KLEVER MARKETING, INC. NOTES TO FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (Continued) NOTE 1 - ORGANIZATION AND SUMMARY OF ACCOUNTING POLICIES(continued): -------------------------------------------------------------------- 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. Reclassifications Certain reclassifications have been made in the 2000 financial statements to conform with the 2001 presentation. Loss per Share The reconciliations of the numerators and denominators of the basic earnings per share computations are as follows:

Per-Share Loss Shares Amount For the three months ended September 30, 2001 --------------------------------------------- Basic Earnings per Share Income available to common shareholders $ (492,926) 12,100,249 $ (0.04) =============== =============== ============== For the three months ended September 30, 2000 --------------------------------------------- Basic Earnings per Share Income available to common shareholders $ (624,163) 12,039,128 $ (0.05) =============== =============== ============== For the nine months ended September 30, 2001 -------------------------------------------- Basic Earnings per Share Income available to common shareholders $ (1,835,920) 12,098,700 $ (0.15) =============== =============== ============== For the nine months ended September 30, 2000 -------------------------------------------- Basic Earnings per Share Income available to common shareholders $ (2,112,233) 12,024,802 $ (0.18) =============== =============== ==============

10 KLEVER MARKETING, INC. NOTES TO FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (Continued) NOTE 1 - ORGANIZATION AND SUMMARY OF ACCOUNTING POLICIES(continued): -------------------------------------------------------------------- Basic earnings per common share were computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share for the three and nine months ended September 30, 2001 and 2000 are not presented as it would be anti-dilutive. Concentration of Credit Risk The Company has no significant off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements. Fixed Assets Fixed assets are stated at cost. Depreciation and amortization are computed using the straight- line method over the estimated economic useful lives of the related assets as follows: Computer equipment 3 years Office furniture and fixtures 5-10 years Upon sale or other disposition of property and equipment, the cost and related accumulated depreciation or amortization are removed from the accounts and any gain or loss is included in the determination of income or loss. Expenditures for maintenance and repairs are charged to expense as incurred. Major overhauls and betterments are capitalized and depreciated over their estimated economic useful lives. Intangibles Intangibles associated with certain technology agreements are amortized over 10 -14 years. Other Current Assets During 2000, the Company purchased supplies of batteries and parts related to research and development of the Klever-Kart System. These supplies are carried at fair market value on the balance sheet. Due to technological changes, these supplies have become obsolete. The parts supplies were sold in January 2001. 11 KLEVER MARKETING, INC. NOTES TO FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (Continued) NOTE 2 - INCOME TAXES The Company has accumulated tax losses estimated at $13,000,000 expiring in years 2007 through 2020. Current tax laws limit the amount of loss available to be offset against future taxable income when a substantial change in ownership occurs. The amount of net operating loss carryforward available to offset future taxable income may be limited if there is a substantial change in ownership. NOTE 3 - LEASE COMMITMENT The Company currently leases approximately 2,262 square feet of office space from Four Cabo's Enterprises, Ltd. on a month to month basis. The lease payments are $31,763 per year. The Company has also entered into lease agreements for the rental of computer equipment. These leases expire between September 2003 and May 2004. The total monthly lease payments due on the above leases is approximately $230. During 2000, the Company entered into a financing agreement for the purchase of a laser printer. The payments on this agreement are $312 per month for a term of 36 months. The minimum future lease payments under these leases for the next five years are: Year Ended December 31, ------------------------------------ 2001 $ 12,108 2002 5,160 2003 4,182 2004 - 2005 - ------------ Total minimum future lease payments $ 21,450 ============ NOTE 4 - RESEARCH AND DEVELOPMENT Research and development of the Klever-Kart System began with the sole purpose of reducing thefts of shopping carts. A voice-activated alarm system was envisioned. As time and technology progressed, the present embodiment of the Klever-Kart System evolved into a "product specific" point-of-purchase advertising system consisting of an easily readable electronic display that attaches to any shopping cart, a shelf mounted message sending unit that automatically sends featured products' ad-message to the display and a host computer using proprietary software. 12 KLEVER MARKETING, INC. NOTES TO FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (Continued) NOTE 4 - RESEARCH AND DEVELOPMENT (continued): During the three months ended September 30, 2001 and 2000, the Company expended $53,456 and $359,046, respectively for research and development of the technology involved with its patents. Due to technological changes during 2000, the Company decided to write-off and expense research and development equipment that had been previously capitalized. The total expense from this write-off is $1,282,845. NOTE 5- RELATED PARTY TRANSACTIONS During 1998 various shareholders loaned the Company $347,100. The notes are payable within one year plus interest at 10% and 12% per annum. During 2000 and 1999 principle payments of $62,500 and $155,850 were paid toward these loans. During the year ended December 31, 2000 and the nine months ended September 30, 2001, shareholders loaned the Company $1,100,000 and $950,000 respectively. This loan is secured by the Company's inventory, accounts receivable, equipment and any proceeds related to these assets. This note is payable within one year plus interest at 10% per annum. The total balance of notes payable due as of September 30, 2001 is $2,178,750. On February 1, 2000 an accrued liability in the amount of $306,666.64 was converted to common shares by exercise of options for the purchase of 579,585 shares at $.86 per share and a note receivable in the amount of $191,776.46. The note is payable in thirty-six equal installments with interest at the rate of eight percent. The note is collateralized by 100,000 shares of the Company's common shares. As of July 31, 2001, the total balance on the note receivable was $98,375. On July 31, 2001, the Company forgave the remaining amount owed on the receivable in exchange for 100,000 shares of common stock that were returned to the Company. NOTE 6- STOCK OPTIONS The shareholders approved, by a majority vote, the adoption of the 1998 Stock Incentive Plan (the "Plan"). Under the Plan, 3,500,000 shares of common stock are reserved for issuance upon the exercise of options which may be granted from time-to-time to officers, directors and certain employees and consultants of the Company or its subsidiaries. The Plan permits the award of both qualified and non-qualified incentive stock options. Under the Plan, an additional 500,000 shares of common stock are reserved for issuance in the form of restricted stock grants. As of December 31, 1998, no options had been granted under the Plan. Compensation expense charged to operations in 2000 and 1999 is $297,686 and $24,010. The following is a summary of transactions: 13 KLEVER MARKETING, INC. NOTES TO FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (Continued) NOTE 6- STOCK OPTIONS (continued):

Shares Under Option ------------------------------- September 30, December 31, ------------------------------- 2001 2000 --------------- -------------- Outstanding, beginning of year 2,685,049 2,898,098 Granted during the year 1,998,449 864,151 Canceled during the year (2,479,245) (361,699) Exercised during the year - (715,501) --------------- -------------- Outstanding, end of year (at prices ranging from $.86 to $3.61 per share) 2,204,253 2,685,049 =============== ============== Eligible, end of year for exercise currently (at prices ranging from $.86 to $3.61 per share) 1,488,831 2,055,752 =============== ==============

NOTE 7 - PREFERRED STOCK On February 7, 2000 the Board of Directors authorized and established the Class A Voting Preferred Stock ("Class A Shares") and Series 1 of such Class A ("Class A, Series 1 Shares") as a class of its $.01 par value, 2,000,000 shares authorized, preferred stock. Class A Shares consists of 1,000,000 shares, 125,000 shares thereof are designated as Class A, Series 1 Shares. On September 24, 2000 the Board of Directors authorized and established the Class B Voting Preferred Stock ("Class B Shares") and Series 1 of such Class B ("Class B, Series 1 Shares") as a class of its $.01 par value, 2,000,000 shares authorized, preferred stock. Class B Shares consists of 250,000 shares, 125,000 shares thereof are designated as Class B, Series 1 Shares. On January 2, 2001 the Board of Directors authorized and established the Class C Voting Preferred Stock ("Class C Shares") and Series 1 of such Class C ("Class C, Series 1 Shares") as a class of its $.01 par value, 2,000,000 shares authorized, preferred stock. Class C Shares consists of 125,000 shares, 125,000 shares thereof are designated as Class C, Series 1 Shares. Each Class A, B, and C Share is convertible at the option of the holder at any time into such number of shares of Common Stock as is determined by dividing the issue price by the conversion price then in effect. Based on the initial conversion price, each Class A, B, and C Share had a conversion rate of one Class A, B, and C Share to ten shares of Common Stock. The rate of conversion is subject to changes based upon an anti-dilution formula. Holders of Classes A, B and C Shares shall be entitled to receive when and as declared by 14 KLEVER MARKETING, INC. NOTES TO FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (Continued) NOTE 7 - PREFERRED STOCK (continued): the Board of Directors of the Company out of any funds at the time legally available therefor dividends at the rate of $2.20, $1.44 and $0.56 per share per annum, respectively, payable semi-annually on the first day of January and July of each year. Such dividends shall accrue on each such share from the date of its original issuance and shall accrue from day to day, whether or not earned or declared. Such dividend shall be cumulative and may be paid in cash or in kind through the distribution of .0425 Shares of the same Class, for each outstanding Share, on each dividend payment date. In addition, each holder of Class A, B and C Shares shall be entitled to receive, when and as declared, a dividend equal to each dividend declared and paid on the shares of Common Stock, on a share for share basis. If there is a split or dividend on the Common Stock, then the Classes A, B and C Share's dividends shall be adjusted as if a similar split or dividend had occurred with respect to the Class A B and C Shares. Class A, B, and C Shareholders shall be entitled to one vote for each share of Common Stock into which such Class A, B, and C Shares could then be converted, and shall have voting rights and powers equal to that of a holder of Common Stock. The holders of Class A, B, and C Shares shall vote with the holders of Common Stock and not as a separate class. Each Class A, Class B, and Class C Share respectively carries a liquidation preference, respectively, of $26, $17 and $6.60 per share plus any accrued but unpaid dividends on such shares, if any, and adjusted for combinations, splits, dividends or distributions of shares of stock with respect to such shares. Class A, B, and C Shares are redeemable by the Company, in whole or in part, at the option of the Board of Directors of the Company, at any time and from time to time on or after July 1, 2002, March 24, 2004 and July 2, 2004, respectively. The redemption price shall be the same as the liquidation preference for such Share. If dividends on the Class A, B, and C Shares, have not been paid for any period, then until all unpaid dividends thereon are paid or set apart for payment, the Company may not pay, declare or set apart any dividend or other distribution of its shares of Common Stock or other shares junion to the Class A, B, and C Shares, nor may any other distributions, redemptions or other payments be made with respect to the shares of Common Stock or other junion shares. NOTE 8 - CONTINGENCIES On September 18, 2001, a Complaint was filed in Superior Court of the State of California, County of San Francisco, by eiKart, L.L.C. ("eiKart") against the Company. The Complaint arises out of a written agreement between the Company and eiKart dated May 11, 2001. Pursuant to the 15 KLEVER MARKETING, INC. NOTES TO FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (Continued) NOTE 8 - CONTINGENCIES (continued): agreement, eiKart was to pursue certain financing sources for the Company. The Complaint also alleges that eiKart was requested by and performed for the Company certain additional financing consulting services. The Complaint also claims that the Company defrauded eiKart by stating that it was seeking interim financing when in reality, the Company was not seeking financing, but trying to "go private" and that the Company defrauded eiKart by not executing an amendment to the written agreement. eiKart seeks payment in the form of stock options and cash as required pursuant to said written agreement as if all benchmarks were satisfied, payment for the fair value of financing services rendered (alleged to be in excess of $300,000) and recovery of damages suffered as a result of the fraudulent misrepresentations in the amount to be proven at trial. The Company disputes all claims as invalid and intends to vigorously defend this action. Management believes that the Company will prevail in this matter, therefore no provision has been made in the financial statements related to this claim. Item 2. Management's Discussion and Analysis or Plan of Operation. General - This discussion should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's annual report on Form 10-KSB/A for the year ended December 31, 2000. Plan of Operations - The Company's goal is to become the leading supplier of in-store promotions and advertising technology for grocery and other mass-merchandise retailers. To accomplish this goal, the Company intends to expand its product offerings to include: (i) electronic couponing (2002) to eliminate the need for and reduce the costs related to paper coupons (including fraud, mis- redemption and mal-redemption); (ii) the establishment of targeted Internet links to enhance customer loyalty with frequent shopper programs and personal shopping programs; (iii) capturing Point-of-Selection data in the aggregate for providing data warehousing and mining services to various interested parties; (iv) the introduction of an electronic locking mechanism to prevent pilferage of shopping carts; and (v) certain other in-store services. Additionally, the Company intends to expand the Klever-Kart System's application to other retailers including superstores, discount stores, toy stores and warehouse stores. Following is a description of the Company's growth strategy, which is dependent upon the Company securing additional financing: 16 Phase I: System Development and Product Movement Test. The product movement test was completed during third quarter 1997. The test took place in a Smith's Food and Drug store located in Salt Lake City, Utah. Information Resources, Inc., an independent company, audited the results of the test which concluded an average 46.8% incremental product movement. Phase II: Cost Reduction & Enhancement. In January 1998, the Company commenced development of the Phase II functional specification that encompassed cost reductions and system enhancements. Improvements on the Klever-Kart(R) system included: a significantly smaller and more sleek design in the appearance and size of the display unit; smaller trigger units with improved sensitivity, more durable plastics, and improved sound fidelity. Upon completion of the Phase II functional specification, the Company began phase II engineering design and development. In September 1999, the Company began parts procurement and other manufacturing processes. Future Business Development 1. Technological Innovation and Expanded Product Offerings The Company is in the process of developing various product enhancements for its retail grocer and consumer goods manufacturer clients and expects to offer these enhancements throughout 2002. These product enhancements include electronic coupons, the Klever-Kard* enhancement to existing frequent shopping programs ("Klever-Kard Program"). The Company is also investigating the opportunity to install an electronic cart locking system on Klever-Kart shopping carts. The electronic locking system is expected to reduce the pilferage of shopping carts by electronically locking the shopping cart's wheel when it is moved beyond the vicinity of the retailer. Electronic Couponing The Company expects to complete the development and testing of the electronic coupon feature of the Klever-Kart System in 2002. The Company expects the electronic coupon feature to be well received by the consumer goods companies, retailers and consumers because it (i) reduces handling costs for both the retailer and consumer goods manufacturer; (ii) virtually eliminates mis- redemption, mal-redemption and fraud associated with paper coupons; and (iii) makes coupon use convenient for the consumer. In addition, this feature is expected to permit the consumer goods manufacturer or retailer to electronically alter the face value of coupon to rapidly customize it for competitive situations, seasonal trends or to alter its value or expiration based upon predetermined redemption rates. Industry sources indicate the number of coupons redeemed annually in the U.S. is approximately 5.3 billion with coupon fraud accounting for more than $300 million in losses to the consumer goods companies. The Company believes the electronic coupon feature of the Klever-Kart System will be superior to competitor product offerings due to the virtual elimination of mis-redemption, mal- redemption and fraud associated with paper coupons. 17 Klever-Kard Program The Company expects to introduce the Klever-Kard Program in 2002. The Klever-Kard Program is a frequent shopper program enhancement that is expected to permit consumer goods companies and retailers to target specific promotional campaigns to individual consumers based upon demographics and personal buying history. Further development of the Klever-Kard Program is expected to include targeted Internet tie-ins, direct mail, rebates, download of shopping lists/recipes, product sampling and electronic contest entry. Information from individual consumer card usage is expected to produce individual customer profiles and track specific marketing and purchasing trends. Using this precedent in conjunction with the Klever-Kart System, the Company expects to sell customer profile information to consumer research companies, consumer goods companies and retailers. 2. Expand Retailer Base The Company expects to expand the Klever-Kart System's orientation to other retailers, including superstores, discount stores, toy stores, do-it-yourself (DIY) stores and warehouse stores. In 2002 the Company plans to install the Klever-Kart System in a pilot store at two or more key retailers across the U.S. The Company believes that the existing Klever-Kart System can be easily adapted to meet the requirements of retailers operating in a variety of environments. Liquidity and Capital Resources - The Company requires working capital principally to fund its current research and development and operating expenses for which the Company has relied on short-term borrowings and the issuance of restricted common stock. There are no formal commitments from banks or other lending sources for lines of credit or similar short-term borrowings, but the Company has been able to borrow any additional working capital that has been required. From time to time in the past, required short-term borrowings have been obtained from a principal shareholder or other related entities. Cash flows. Operating activities used cash of $298,000 and $291,000 for the three months ended September 30, 2001 and 2000, respectively. Investing activities have used cash of $93,000 and $93,000 for the three months ended September 30, 2001 and 2000. Investing activities primarily represent purchases of patents relating to the electronic in-store advertising, directory and coupon devices, and purchases of office equipment. Financing activities provided cash of $403,000 and $784,000 for the three months ended September 30, 2001 and 2000, respectively. Financing activities primarily represent sales of the Company's common and preferred stock. The Company will be required to supplement its available cash and other liquid assets with proceeds from borrowing, the sale of additional securities, or other sources. There can be no assurance that any such required additional funding will be available or, if available, that it can be obtained on 18 terms favorable to the Company. PART II - OTHER INFORMATION Item 1. Legal Proceedings On September 18, 2001, a Complaint was filed in Superior Court of the State of California, County of San Francisco, by eiKart, L.L.C. ("eiKart") against the Company. The Complaint arises out of a written agreement between the Company and eiKart dated May 11, 2001. Pursuant to the agreement, eiKart was to pursue certain financing sources for the Company. The Complaint also alleges that eiKart was requested by and performed for the Company certain additional financing consulting services. The Complaint also claims that the Company defrauded eiKart by stating that it was seeking interim financing when in reality, the Company was not seeking financing, but trying to "go private" and that the Company defrauded eiKart by not executing an amendment to the written agreement. eiKart seeks payment in the form of stock options and cash as required pursuant to said written agreement as if all benchmarks were satisfied, payment for the fair value of financing services rendered (alleged to be in excess of $300,000) and recovery of damages suffered as a result of the fraudulent misrepresentations in the amount to be proven at trial. The Company disputes all claims as invalid and intends to vigorously defend this action. Management believes that the Company will prevail in this matter, therefore no provision has been made in the financial statements related to this claim. Item 2. Changes in Securities The Company sold 877,647 shares of common stock and 94,191 shares of preferred stock during 2000. In addition, during the three months ended September 30, 2001, the Company sold 3,466 shares of common stock to individuals for $0.82 per share. All of such stock was sold in private placements to accredited investors directly by the Company without an underwriter in transactions exempt from registration under Regulation D Rule 506 and Section 4(2) of the Securities Act of 1933, as amended. The total offering price of such securities was $3,180,828 for 2000 and $2,842 for the three months ended September 30, 2001. No underwriting commissions were paid. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information None. 19 Item 6. Exhibits and Reports on Form 8-K Exhibit Number Title of Document 3.01 Restated Certificate of Incorporation of Klever Marketing, Inc. a Delaware corporation (1) 3.02 Certificate of Designation of Rights, Privileges and Preferences: Rights of A Class Voting Preferred Stock, Series 1, of Klever Marketing, Inc., dated February 7, 2000 (2) 3.03 Bylaws, as amended (2) 4.01 Amended Certificate of Designation of Rights, Privileges and Preferences: Rights of A Class of Voting Preferred Stock, Series 1, of Klever Marketing, Inc., Dated February 7, 2000 (3) 4.02 Certificate of Designation of Rights, Privileges and Preferences of Class B Voting Preferred Stock, of Klever Marketing, Inc., dated September 24, 2000 (3) 4.03 Certificate of Designation of Rights, Privileges and Preferences of Class C Voting Preferred Stock, of Klever Marketing, Inc., dated January 2, 2001 (3) 10.01 Employment Agreement between Gerard C. Coelsch and the Registrant Dated June 26, 1998 (2) 10.02 Employment Agreement between Corey Hamilton and the Registrant Dated July 24, 2000 (2) 10.03 Separation Agreement between Paul G. Begum and the Registrant Dated January 8, 2001 (2) 10.04 Stock Incentive Plan, effective June 1, 1998 (2) 10.05 Amended and Restated Promissory Note (Secured) of the Registrant payable to Presidio Investments, LLC, dated June 27, 2000, with Financing Statement and Exhibit "A" (2) 10.06 Employment Agreement between Corey Hamilton and the Registrant Dated August 1, 2001. (1) Incorporated herein by reference from Registrant's Form 10KSB, Dated June 20, 1997. 20 (2) Incorporated herein by reference from Registrant's Form 10KSB, Dated March 29, 2001. (3) Incorporated herein by reference from Registrant's Form 10QSB, Dated May 15, 2001. On October 1, 2001, the Company filed a report on 8K reporting as of September 28, 2001 a reduction of work force under Item 9. On October 11, 2001, the Company filed a report on 8K reporting the resignation of Paul G. Begum as a director prior to the annual Stockholders' Meeting on September 27, 2001, under Item 9. Also reported on the 8K was the October 1, 2001 resignation of Corey A. Hamilton as President and C.E.O. and as a director, under Item 9. 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. Klever Marketing, Inc. (Registrant) DATE: November 14, 2001 ------------------------------------ By: /s/ Richard J. Trout ------------------------------------ Richard J. Trout President & Director (Principal financial and Accounting Officer) 21