UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-26624
ALTERNATE MARKETING NETWORKS, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 38-2841197
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Ionia, SW, Suite 520, Grand Rapids, Michigan 49503
(Address of principal executive offices) (Zip Code)
616-235-0698 FAX 616-235-3405
(Issuer's telephone number, including area code)
Check whether the registrant (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[ ]
As of August 6, 2002, there were 8,802,028 shares of the issuer's common stock,
par value $0.01 per share, outstanding.
ALTERNATE MARKETING NETWORKS, INC. AND SUBSIDIARIES
FORM 10-QSB
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION: No.
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets - June 30, 2002,
and December 31, 2001. . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations - three
and six months ended June 30, 2002 and 2001. . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows - six
months ended June 30, 2002 and 2001. . . . . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements. . . . . . 7
Item 2. Management's Discussion and Analysis or Plan
of Operation. . . . . . . . . . . . . . . . . . . . . . . . . 11
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 18
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . . . 18
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . 18
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . 18
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . 18
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . 18
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
ALTERNATE MARKETING NETWORKS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
ASSETS
June 30, December 31,
2002 2001
(unaudited)
------------ ------------
Current assets:
Cash and cash equivalents $1,257,834 $3,783,082
Accounts receivable, trade, net of
allowance of $100,000 at June 30,
2002 and December 31, 2001 3,136,959 3,063,875
Prepaid expenses and other current
assets 97,079 160,005
Refundable federal income tax 180,000 180,000
---------- ----------
Total current assets 4,671,872 7,186,962
Property and equipment, net 60,662 77,326
Other assets:
Computer software, net 45,485 66,991
Deferred acquisition costs 206,504 --
Goodwill, net 800,889 2,004,947
---------- ----------
Total other assets 1,052,878 2,071,938
---------- ----------
Total assets $5,785,412 $9,336,226
========== ==========
Continued
ALTERNATE MARKETING NETWORKS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, December 31,
2002 2001
(unaudited)
----------- -----------
Current liabilities:
Notes payable, bank $ 165,000 $ --
Accounts payable 1,528,097 1,596,613
Accrued liabilities 191,636 184,652
Deferred revenue 9,375 15,625
Dividend payable - 2,293,052
---------- ----------
Total current liabilities 1,894,108 4,089,942
Commitments and contingencies (Note 7)
Shareholders' equity:
Common stock-no par value, voting,
14,000,000 authorized shares; 4,586,005
shares issued and outstanding at June 30,
2002 and December 31, 2001 11,708,282 11,708,282
Accumulated losses, through September 30,
1993 (Note 4) (1,291,039) (1,291,039)
---------- ----------
Total common stock 10,417,243 10,417,243
Accumulated losses, since October 1,
1993 (Note 4) (6,525,939) (5,170,959)
---------- ----------
Total shareholders' equity 3,891,304 5,246,284
---------- ----------
Total liabilities and
shareholders' equity $5,785,412 $9,336,226
========== ==========
See notes to the condensed consolidated financial statements.
ALTERNATE MARKETING NETWORKS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three months ended Six months ended
June 30, June 30,
---------------------- ------------------------
2002 2001 2002 2001
---------- ---------- ----------- -----------
(unaudited) (unaudited)
Net sales $4,236,940 $4,202,135 $ 8,318,485 $ 7,762,232
Cost of sales 3,325,403 3,302,604 6,497,332 6,053,523
--------- ---------- ----------- -----------
Gross profit 911,537 899,531 1,821,153 1,708,709
Selling, general and
administrative expenses 982,673 1,093,230 1,984,931 2,168,892
---------- ---------- ----------- -----------
Loss from operations ( 71,136) ( 193,699) ( 163,778) ( 460,183)
Other income (expense), net 5,042 34,441 12,856 80,037
---------- ---------- ----------- -----------
Loss before accounting
change ( 66,094) ( 159,258) ( 150,922) ( 380,146)
Cumulative effect of
accounting change (Note 6) - - ( 1,204,058) --
---------- ---------- ----------- -----------
Net loss ($ 66,094) ($ 159,258) ($1,354,980) ( $ 380,146)
========== ========== ========== ===========
Net loss per share (Note 3)
Basic and diluted loss per share:
Loss before accounting
change ($ .01) ($ .03) ($ .03) ($ .08)
Cumulative effect of
accounting change - - ( .26) --
---------- ---------- ----------- -----------
Net loss ($ .01) ($ .03) ($ .29) ($ .08)
========== ========== =========== ===========
Weighted average number of shares
outstanding: (Note 3)
Basic and diluted 4,586,005 4,601,508 4,586,005 4,640,049
========== ========== =========== ===========
See notes to the condensed consolidated financial statements.
ALTERNATE MARKETING NETWORKS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Six months ended
June 30,
--------------------------
2002 2001
------------ ------------
(unaudited)
Operating Activities:
Net loss ($1,354,980) ($ 380,146)
Depreciation and amortization 38,170 112,386
Cumulative effect of accounting change 1,204,058 --
Net change in operating assets and
liabilities ( 284,444) 47,628
---------- ----------
Net cash used in operating activities ( 397,196) ( 220,132)
---------- ----------
Net cash used in investing activities - ( 5,006)
---------- ----------
Financing Activities:
Payment of dividend payable ( 2,293,052) --
Increase in notes payable 165,000 --
Repurchase of common stock -- ( 114,065)
---------- ----------
Net cash used in financing
activities ( 2,128,052) ( 114,065)
---------- ----------
Net decrease in cash and cash
equivalents ( 2,525,248) ( 339,203)
Cash and cash equivalents, beginning
of period 3,783,082 3,196,179
---------- ----------
Cash and cash equivalents, end of
period $1,257,834 $2,856,976
========== ==========
See notes to the condensed consolidated financial statements.
ALTERNATE MARKETING NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Summary of Significant Accounting Policies:
The interim financial data is unaudited; however, in the opinion of
management, the interim data includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the results
of operations for the interim periods. The financial statements included
herein have been prepared by the Company pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures included herein are adequate to make the information presented not
misleading. The results of operations for the three months and six months
ended June 30, 2002 are not necessarily indicative of the results of operations
expected for the year ending December 31, 2002.
Certain prior year amounts have been reclassified to conform with current
year classifications.
The year-end condensed balance sheet data was derived from audited
financial statements, but does not include all disclosures required by
generally accepted accounting principles. The organization and business of the
Company, accounting policies followed by the Company and other information are
contained in the notes to the Company's financial statements filed as part of
the Company's Form 10-KSB for the fiscal year ended December 31, 2001. This
quarterly report should be read in conjunction with the Form 10-KSB.
2. Income Taxes:
At June 30, 2002, the Company had net operating loss carryforwards of
approximately $2,550,000, which are available to reduce future taxable income.
Related deferred tax assets are fully reserved for. These carryforwards expire
in 2006 to 2013. Net operating loss carryforwards relate to the operations of
National Home Delivery, Inc. prior to the pooling of interest and are subject
to certain annual limitations. The Company does not recognize any income tax
benefit based upon management's estimate of the realizability of deferred tax
assets.
3. Net Loss Per Share Calculations:
Earnings (loss) per basic share is calculated by dividing net income
(loss) available to common shareholders by the weighted average shares of
common stock outstanding during the period. Diluted earnings (loss) per share
is calculated by dividing the net income available to common shareholders by
the weighted average number of common shares used in the basic earnings per
share calculation plus the number of common shares that would be issued
assuming conversion of all potentially dilutive shares outstanding. Stock
options and warrants were excluded from the calculation of the loss per share
due to the net loss and the exercise prices of the options and warrants
exceeding the average market price of the common stock.
4. Accumulated Losses:
Accumulated losses, through September 30, 1993, represent the losses and
capital of the Company during the period of time it was a subchapter S
corporation. All subsequent losses of the combined entities are presented
under Accumulated losses, since October 1, 1993.
5. Segment Information:
The Company evaluates profitability and allocates assets and resources by
dividing its business into two operating segments by product areas: Advertising
and Marketing, which includes newspaper advertising and online marketing; and
Logistics, which includes the delivery and marketing of telephone directories,
as well as, tracking, verification and transportation services. Management
evaluates segment profitability by reviewing gross profits. Substantially all
of the Company's revenues are generated in the United States.
Segment analysis is provided in the tables below.
Three months ended Six months ended
June 30, June 30,
---------------------- ------------------------
2002 2001 2002 2001
---------- ---------- ----------- -----------
Revenues:
Advertising and Marketing $3,320,664 $2,505,984 $6,613,273 $4,826,980
Logistics 916,276 1,696,151 1,705,212 2,935,252
---------- ---------- ---------- ----------
Total Revenues $4,236,940 $4,202,135 $8,318,485 $7,762,232
========== ========== ========== ===========
Gross Profits:
Advertising and Marketing $ 511,230 $ 406,006 $1,083,135 $ 849,732
Logistics 400,307 493,525 738,018 858,977
---------- ---------- ---------- ----------
Total Gross Profit 911,537 899,531 1,821,153 1,708,709
Selling, general &
administrative expenses 982,673 1,093,230 1,984,931 2,168,892
Other income, net 5,042 34,441 12,856 80,037
---------- ---------- ---------- ----------
Loss before accounting change ($ 66,094)($ 159,258)($ 150,922) ($ 380,146)
========== ========== ========== ==========
Gross Profit Percentages:
Advertising and Marketing 15.4% 16.2% 16.4% 17.6%
Logistics 43.7% 29.1% 43.2% 29.3%
---------- ---------- ---------- ----------
Total Gross Profit 21.5% 21.4% 21.9% 22.0%
========== ========== =========== ===========
6. Change in Accounting for Goodwill Impairment and Amortization:
In July 2001, the FASB issued SFAS No. 141 "Business Combinations" and
SFAS No. 142 "Goodwill and Intangible Assets." Both of these Standards provide
guidance on how companies account for acquired businesses and related
disclosure issues.
Chief among the provisions of these standards are 1) elimination of the
"pooling of interest" method for transactions initiated after June 30, 2001,
2) elimination of amortization of goodwill and "indefinite-lived" intangible
assets effective for the Company on January 1, 2002, and 3) annual impairment
testing and potential loss recognition for goodwill and non-amortized
intangible assets, also effective for the Company on January 1, 2002.
In connection with the adoption of SFAS No. 142, the Company allocated
goodwill to each of its reporting units and tested this goodwill for impairment
as of January 1, 2002. The Company completed the impairment testing during the
second quarter ending June 30, 2002. As a result, an impairment charge of
$1,204,058 was recorded to goodwill assigned to the Logistics reporting unit.
The remaining goodwill of $800,889 at June 30, 2002 is assigned to the
Advertising and Marketing reporting unit. The fair value of the reporting
units was estimated using a combination of valuation techniques including the
discounted present value of future cash flows and management's estimated values
to a third party buyer.
The charge was recorded as a cumulative effect of an accounting change of
$1,204,058 or $0.26 per share as of January 1, 2002 in the six months ended
June 30, 2002, in the accompanying condensed consolidated statements of
operations. The previously reported results of operations for the three months
ended March 31, 2002, have been restated by these same amounts as follows:
As Reported As Restated
----------- -----------
Loss before accounting change ($ 84,828) ($ 84,828)
Cumulative effect of accounting
change -- ( 1,204,058)
---------- ----------
Net loss ($ 84,828) ($1,288,886)
========== ==========
Basic and diluted loss per share:
Loss before accounting change ($ 0.02) ($ 0.02)
Cumulative effect of accounting
change - ( 0.26)
---------- ----------
Net loss ($ 0.02) ($ 0.28)
========== ==========
Regarding the elimination of goodwill and indefinite-lived intangible
amortization, this change has been made prospectively upon adoption of SFAS No.
142 as of January 1, 2002. Results of operations for prior periods is
disclosed, exclusive of comparable amortization expense that is eliminated in
post-2001 periods as follows:
Three months ended Six months ended
June 30, 2001 June 30, 2001
Amount Per Share Amount Per Share
Net loss as reported ($159,258) ($0.03) ($380,146) ($0.08)
Add back amortization expense 37,391 $0.00 74,782 $0.01
Comparable net income (loss) ($121,867) ($0.03) ($305,364) ($0.07)
The Company continues to amortize intangible assets consisting of software
over three to five years. As of June 30, 2002, the unamortized balance of
software consisted of $115,205 less accumulated amortization of $69,720.
Amortization expense for the three months and six months ending June 30, 2002
was $10,753 and $21,506, respectively.
7. Subsequent Events:
In July 2002, the Company declared and paid a cash dividend to its
shareholders of $0.10 per share or $458,601.
On May 31, 2002, the Company entered into an Amended and Restated
Agreement and Plan of Reorganization pursuant to which it would acquire Hencie,
Inc. Hencie, Inc. is an information technology company offering solutions and
applications for a broad range of clients and industry segments. The
acquisition was ratified at the annual shareholder meeting held July 23, 2002.
The effective date of the acquisition was August 1, 2002. In exchange for
approximately 80% of Hencie's common shares, the Company issued 3,982,323
shares of its common stock utilizing an exchange ratio of 1 share of its common
stock for 3.563 shares of Hencie common stock. The business of Hencie will add
a third operating segment to the Company's services. Costs directly related
to this acquisition of $206,504 are deferred at June 30, 2002.
The purchase price allocation for the Hencie acquisition has not been
finalized. However, on a preliminary basis, the Company currently estimates
that the common shares issued will be valued at approximately $2.7 million, and
Hencie's net liabilities assumed by the Company are $4.3 million, which will
result in goodwill and other intangible assets of approximately $7.0 million.
Under SFAS No. 142, any goodwill and other indefinite lived assets will not be
subject to amortization but will be tested for impairment at least annually.
At the closing of the Hencie acquisition, the Company paid approximately
$609,000 to the Internal Revenue Service to satisfy an amount owed by Hencie,
which was included in the net liabilities assumed. Also, the Company reached
a settlement agreement with Edge Technology Group, Inc. for the settlement of
Hencie debt, which was included in the net liabilities assumed. The aggregate
amount of the obligation under the Settlement Agreement was $1,650,000 and
calls for future monthly payments of $60,000 principal and interest at 8%. As
of August 7, 2002, the outstanding balance was $1,561,918. After three monthly
installments are paid and certain other conditions are satisfied, a credit of
$450,000 may be applied to the settlement amount.
On August 1, 2002, the Company reincorporated in Delaware and exchanged
its common stock, no par value, for new common stock, $0.01 par value.
Item 2. Management's Discussion and Analysis or Plan of Operation
The information in this report contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Any
statements contained in this report that are not statements of historical fact
may be deemed forward-looking statements. Words such as "may," "might,"
"will," "would," "should," "could," "project," "estimate," "pro forma,"
"predict," "potential," "strategy," "anticipate," "plan to," "believe,"
"continue," "intend," "expect" and words of similar expression (including the
negative of any of the foregoing) are intended to identify forward-looking
statements. Additionally, forward-looking statements in this report include
statements relating to the design, development, and implementation of our
products; the strategies underlying our business objectives; the benefits to
our customers and their trading partners of our products; our liquidity and
capital resources; and the impact of our acquisitions and investments on our
business, financial conditions, and operating results.
Our forward-looking statements are not meant to predict future events or
circumstances and may not be realized because they are based upon current
expectations that involve risks and uncertainties. Actual results and the
timing of certain events may differ materially from those currently expected
as a result of these risks and uncertainties. Factors that may cause or
contribute to a difference between the expected or desired results and actual
results include, but are not limited to, dependence upon software vendors,
inability to maintain Nasdaq SmallCap Market listing, inability to obtain
adequate financing, insufficient cash flows and resulting illiquidity,
inability to expand business, inability to manage planned expansion, lack of
diversification, changes in levels of sales, increased competition, changing
customer relationships, results of arbitration and litigation, stock
volatility, the timing of receipt of orders, the implementation of the
Company's reorientation as a marketing services company, the effectiveness of
the marketing programs success in developing and capitalizing on strategic
alliances, and integration of Hencie, Inc. (a recent acquisition) in the
Company's business operations. Given these uncertainties, investors are
cautioned not to place undue reliance on our forward-looking statements. We
disclaim any obligation to update these factors or to announce publicly the
results of any revisions to any of the forward-looking statements contained in
this report to reflect future events or developments.
Investors should read the following discussion and analysis in conjunction
with the sections entitled "Risk Factors - Risks Related to the Transaction"
and "Risk Factors - Risks Related to the Business of New ALTM after the
Transaction" of the most recent Proxy Statement filed by the Company, our
Condensed Consolidated Financial Statements and the related notes thereto
included in Item 1 of Part I of this report, and our other documents as filed
by the Company from time to time with the Securities and Exchange Commission.
Overview and Plan of Operation
Alternate Marketing Networks, through its subsidiaries, is a single-source
provider of outsourcing and marketing services. As of June 30, 2002, the
Company served the newspaper, consumer package goods, telecommunications,
automotive, and tourism industries with both short-term and long-term contracts
and offered comprehensive services through two primary groups of services: (I)
Advertising and Marketing Group and (II) Logistics Group.
* Advertising and Marketing Group. This product group consists of U.S.
Suburban Press ("USSPI") and ilikesamples.com. Services provided by this group
include suburban newspaper advertising, Hispanic newspaper advertising, and
deliveries of product samples to targeted consumers via the Internet.
* Logistics Group. This product group consists of Alternate Postal Direct
and Total Logistics. Services include the delivery of telephone directories
for regional and national companies, as well as tracking, verification and
transportation of other goods.
With the completion of the acquisition of Hencie, Inc., a Texas-based
information technology solutions provider on August 1, 2002, the Company added
a third area of business: Technology Services. The Technology Services Group
will consist of Hencie and will provide system integration solutions to a broad
range of middle market companies in the manufacturing, distribution, energy,
and travel and hospitality industries. The Company will provide outsourcing
functions to all of its clients through its three areas of services.
Accounting Policies Estimates and Judgements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount 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. Assumptions and estimates of future earnings and cash flows
are used in the periodic analyses of the recoverabilty of goodwill, deferred
tax assets, and property, plant and equipment. Historical experience and
trends are used to estimate reserves, including reserves for bad debts. To the
extent that future earnings, cash flows and costs and losses are determined to
be different from the assumptions and estimates used, adjustments may be
required.
In connection with the adoption of SFAS No. 142, the Company allocated
goodwill to each of its reporting units and tested this goodwill for impairment
as of January 1, 2002. The Company completed the impairment testing during the
second quarter ending June 30, 2002. As a result, an impairment charge of
$1,204,058 was recorded to goodwill assigned to the Logistics reporting unit.
The fair value of the reporting units was estimated using a combination of
valuation techniques including the discounted present value of future cash
flows and management's estimated values to a third party buyer.
The charge was recorded as a cumulative effect of an accounting change in
the amount of $1,204,058 or $0.26 per share as of January 1, 2002 in the six
months ended June 30, 2002, in the accompanying condensed consolidated
statements of operations.
Results of Operations - Quarter
Net sales: During the second fiscal quarter ended June 30, 2002, combined
sales remained relatively constant as compared to the same period in the
preceding year, although the mix of revenues changed significantly. Net sales
increased $34,805 (0.82%) for the three months ended June 30, 2002 to
$4,236,940 from $4,202,135 for the three months ended June 30, 2001. This
increase was due to an approximate increase of $836,000 in revenue related to
suburban newspaper advertising resulting from sales to new customers and
additional sales volume to existing clients, offset by an approximate decrease
of $361,000 related to logistics and transportation due to the expiration of
some client orders from the packaged goods industry, and an approximate
decrease of $419,000 related to the delivery of telephone directories resulting
from the expiration of a specific contract, and the Company's decision to focus
on its largest core directory client.
Gross profit: The gross margin for this year's quarter remained relatively
constant as compared to the same period in the previous year (21.5% for 2002
and 21.4% for 2001).
Three months ended Six months ended
June 30, June 30,
------------------ -----------------
2002 2001 2002 2001
------- ------- ------- ------
Gross Margin Percentages:
Advertising and Marketing 15.4% 16.2% 16.4% 17.6%
Logistics 43.7% 29.1% 43.2% 29.3%
---------- ---------- ---------- ----------
Total Gross Margin 21.5% 21.4% 21.9% 22.0%
========== ========== =========== ===========
The gross profit increased $12,006 (0.1%) to $911,537 for the three months
ended June 30, 2002 from $899,531 for the three months ended June 30, 2001.
The mix of revenues causes the gross profit to fluctuate based on gross profit
levels of individual product lines and the percentage of total revenue that
each product line produces. While the telephone directory division recognized
an increase in gross margin from 32% in 2001 to 50% in 2002, the combined gross
margin of the Company was not affected due to the decrease in revenues
associated with this revenue stream. The gross margins generally range from 15%
to 20% for the Advertising and Marketing Group, and 30% to 50% for the
Logistics Group (See Note 5 in NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS for more information on the mix of revenues and direct costs.)
Selling, general and administrative expenses: During the quarter ending
June 30, 2002, selling, general and administrative expenses decreased $110,557
(10%) to $982,673 from $1,093,230 for the three months ended June 30, 2001.
The Company has a variable overhead component relating to the delivery of
telephone directories which causes fluctuations in overhead from quarter to
quarter; as sales from this product line have decreased, the overhead
associated with it has also decreased. In addition, the Company has closely
monitored overhead items to search for potential reductions in fixed overhead
and as a result has terminated an outsourcing relationship previously used by
the Advertising and Marketing Group, and is currently providing these services
internally. As a result, for the quarter ending June 30, 2002, the Company
realized savings in overhead expenses of approximately $30,000 as compared to
the quarter ending June 30, 2001. During the quarter ending June 30, 2002, the
Company also recognized a decrease in amortization expense of approximately
$37,000 as a result of the elimination of goodwill amortization pursuant to FAS
No. 142 (See Note 6 in NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS for
more information on the implementation of FAS No. 142).
Other income (expense), net: Other income (expense), net consists of
interest income and interest expense. Interest income for the three months
ended June 30, 2002 and 2001 was $5,475 and $34,441, respectively. Interest
expense was $433 during the 2002 period and $0 during the 2001 period. The
decrease in interest income is largely due to the payment of a cash dividend
of $2,293,052 in January of 2002. The interest expense was interest incurred
on the outstanding balance on the Company's lines of credit.
Results of Operations - Six Months
Net sales: Net sales increased approximately 7%, or $556,000, for the
six months ending June 30, 2002 as compared to the same period last year. An
increase in revenue of approximately $1,837,000 from the suburban newspaper
advertising revenue stream was offset by decreases from logistics and
transportation of approximately $656,000 and $574,000 from the delivery of
telephone directories.
Gross profit: For the six month period ending June 30, 2002, the gross
margin remained relatively the same as the preceding year (21.9% in 2002 and
22.0% in 2001). The gross profit increased $112,444 (7%) to $1,821,153 for the
six months ended June 30, 2002 from $1,708,709 for the six months ended June
30, 2001. Gross margins generally range from 15% to 20% for the Advertising and
Marketing Group, and 30% to 50% for the Logistics group. The telephone
directory division recognized an increase in gross margin from 33% in 2001 to
51% in 2002; however, the combined gross margin of the Company was not affected
due to the decrease in revenues associated with this revenue stream (See Note
5 in NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS for more information
on the mix of revenues, direct costs, and gross profit percentages).
Selling, general and administrative expenses: For the six months ended
June 30, 2002, these expenses decreased $183,961 (8%) to $1,984,931 from
$2,168,892 for the same period in the previous year. The Company has a
variable overhead component relating to the delivery of telephone directories
which causes fluctuations in overhead from quarter to quarter; as sales from
this product line have decreased, the overhead associated with it has also
decreased. In addition, the Company has closely monitored overhead items to
search for potential reductions in fixed overhead and as a result has
terminated an outsourcing relationship previously used by the Advertising and
Marketing Group, and is currently providing these services internally. As a
result, for the six months ending June 30, 2002, the Company realized savings
in overhead expenses of approximately $53,000 as compared to the six months
ending June 30, 2001. During the six months ending June 30, 2002, the Company
also recognized a decrease in amortization expense of approximately $74,000 as
a result of the elimination of goodwill amortization pursuant to FAS No. 142
(See Note 6 in NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS for more
information on the implementation of FAS No. 142).
Other income (expense), net: Other income (expense), net consists of
interest income and interest expense. Interest income for the six months ended
June 30, 2002 and 2001 was $13,289 and $80,037, respectively. Interest expense
was $433 during the 2002 period and $0 during the 2001 period. The decrease
in interest income is largely due to the payment of a cash dividend of
$2,293,052 in January of 2002.
Cumulative effect of accounting change: In connection with the adoption
of SFAS No. 142, the Company allocated goodwill to each of its reporting units
and tested this goodwill for impairment as of January 1, 2002. The Company
completed the impairment testing during the second quarter ending June 30,
2002. As a result, an impairment charge of $1,204,058 was recorded to goodwill
assigned to the Logistics reporting unit. The fair value of the reporting
units was estimated using a combination of valuation techniques including the
discounted present value of future cash flows and management's estimated values
to a third party buyer.
Seasonality and Other Business Fluctuations
Although the Company experiences some seasonality in operations
corresponding with holiday advertising, such variations are not material to
overall results of operations. Revenues from the delivery of telephone
directories fluctuate with contracted delivery schedules of the Company's
customers and vary during the course of the year.
The events from the national economy that impact the Company include
employment levels, postal regulations, gasoline prices, and newsprint and
coated-paper price increases. An increase in employment levels affects the
available pool of contract carriers that make the deliveries for the Company's
distribution network. This usually increases the cost of recruitment for the
private delivery and newspaper networks, including the Alternate Postal Direct,
Inc. subsidiary, and may contribute to increased delivery costs.
Liquidity and Capital Resources
During the first six months of 2002, the Company recognized a decrease in
cash of $2,525,248. During the same period of 2001, the Company recognized a
decrease in cash of $339,203.
The net losses include non-cash expenses for depreciation and amortization
of $16,664 and $21,506, respectively, for the 2002 period, compared to $24,692
and $87,694, respectively for the 2001 period. The amortization for the 2001
period included $74,782 for goodwill amortization. Other cash flow used in
operating activities included working capital fluctuations of ($284,444) and
$47,628 for the six months ended June 30, 2002 and 2001, respectively.
Cash flow used in financing activities for the six months ended June 30,
2002 included a payment of dividends accrued at December 31, 2001 of
$2,293,052, and net borrowing on the line of credit of $165,000. In addition,
during the six months ended June 30, 2001 the Company used cash to repurchase
and retire 103,100 shares of its common stock for $114,065. The Board of
Directors authorized up to 300,000 shares to be repurchased by the Company.
The Company has a $1,000,000 bank line of credit with Fifth Third Bank for
its subsidiary, National Home Delivery, Inc. and a $500,000 line of credit for
its subsidiary, Alternate Postal Direct, Inc. Available borrowings are based
upon 65% of eligible accounts receivable, not more than 90 days old. The
agreements were executed on March 12, 2002 and expire May 1, 2003. Borrowings
bear interest payable monthly at the Bank Prime Rate (4.75% as of June 30,
2002). The agreements are collateralized by all accounts receivable and
equipment and are subject to certain restrictive financial covenants relating
to working capital and tangible net worth. As of June 30, 2002, borrowings in
the amount of $165,000 were outstanding on the Alternate Postal Direct line of
credit and nothing was outstanding on the National Home Delivery line of
credit. As of August 13, 2002, borrowings were outstanding on the Alternate
Postal Direct line of credit in the amount of $300,000 and on the National Home
Delivery line of credit in the amount of $400,000. Additional borrowings were
primarily due to closing costs of the Hencie acquisition. As of that date, the
unused portion available under the lines of credit was $800,000.
Subsequent to June 30, 2002, the Company realized a decrease in cash
relating to (i) the payment of a cash dividend, and (ii) a payment to the
Internal Revenue Service as part of the closing of the Hencie acquisition.
On July 29, 2002, the Company paid a cash dividend to its shareholders of
record on July 22, 2002 in the amount of $0.10 per share, or $458,601.
At the closing of the Hencie acquisition, the Company paid approximately
$609,000 to the Internal Revenue Service to satisfy an amount owed by Hencie,
which was included in the net liabilities assumed. Hencie had been making
monthly installment payments of $92,000.
Also, the Company reached a Settlement Agreement with Edge Technology
Group, Inc. for the settlement of Hencie debt, which was included in the net
liabilities assumed. The aggregate amount of the obligation under the
Settlement Agreement was $1,650,000 and calls for future monthly payments of
$60,000 principal and interest at 8%. As of August 7, 2002, the outstanding
balance was $1,561,918. After three monthly installments are paid and certain
other conditions are satisfied, a credit of $450,000 may be applied to the
settlement amount.
The Company believes that its current cash balance, along with the lines
of credit and the credit facilities of Hencie, will be sufficient to fund its
current operational plans as well as meet its presently anticipated capital
requirements for the next twelve months.
Recent Events
The Advertising and Marketing Group is expected to continue to operate at
the increased revenue levels established in the first half of 2002. The
Logistics Group expects to maintain recent gains in gross margins by
controlling direct costs, but also expects to see revenues and direct costs
decline modestly due to fewer shipments by its manufacturing clients.
The Company completed its previously announced acquisition of Hencie, Inc.
on August 1, 2002. The Company believes that this acquisition will provide
better potential for the Company to grow both its revenue and gross margin.
The business of Hencie will operate as a third business segment, the Technology
Services Group.
Both the Advertising and Marketing Group and the Logistics Group will
complement the Technology Services Group by providing outsourcing services.
The Company has received a Nasdaq Staff Determination indicating that the
Company's securities are subject to delisting from the Nasdaq SmallCap Market
because the Staff believes that the acquisition of Hencie constitutes a
"reverse merger" under Marketplace Rule 4330(f) and requires the Company to
satisfy Nasdaq's initial listing requirements in order to remain on the
exchange. The Company has requested a hearing before a Nasdaq Listing
Qualifications Panel to appeal the Staff's classification of the transaction
and to review the delisting determination; a hearing has been scheduled for
September 2002. The Company's securities will continue to be listed on the
Nasdaq SmallCap Market pending the outcome of the hearing, although there can
be no assurance that the Panel will grant the Company's request for continued
listing.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds.
On or about August 1, 2002, Alternate Marketing Networks, Inc. changed
its state of incorporation from Michigan to Delaware by merging into its wholly
owned Delaware subsidiary. As a result of the merger this Company's charter
documents (certificate of incorporation and bylaws) have changed. In
particular the outstanding common stock, no par value, was exchanged for new
common stock, $.01 par value.
On or about August, 1, 2002, the Company issued an aggregate of 3,982,323
shares of its common stock to shareholders of Hencie, in exchange for
approximately eighty percent (80%) of the common stock of Hencie, Inc. Such
issuance was not registered under the Securities Act of 1933 in reliance upon
an exemption of the Act. No brokers or underwriters were involved and no
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.
Item 6. Exhibits and Reports on Form 8-K.
During the period of this report, the following documents were filed:
8-K filed April 24, 2002 for the acquisition of Hencie, Inc. for Current Report
event dated April 9, 2002.
*Exhibit 2.1 Amended and Restated Agreement and Plan of Reorganization,
dated as of May 31, 2002, by and among Alternate Marketing Networks, Inc., a
Michigan corporation, Alternate Marketing Networks, Inc., a Delaware
corporation, ALTM Combination Co., a Delaware corporation, Hencie, Inc., a
Delaware corporation, Adil Khan and certain stockholders of Hencie, Inc. (filed
as Appendix A to the proxy statement of Alternate Marketing Networks, Inc., a
Michigan corporation, dated as of July 23, 2002, filed with the Securities and
Exchange Commission as of June 16, 2002, and incorporated herein by reference)
*Exhibit 4.1 Amended and Restated Certificate of Incorporation of Alternate
Marketing Networks, Inc., a Delaware corporation, dated as of July 26, 2002
*Exhibit 4.2 Amended and Restated Bylaws of Alternate Marketing Networks, Inc.,
a Delaware corporation, dated as of July 26, 2002
*Exhibit 4.3 Registration Rights Agreement, dated as of August 1, 2002, by and
among Alternate Marketing Networks, Inc., a Delaware corporation, certain
stockholders of Hencie, Inc., a Delaware corporation, and the officers,
directors and ten percent stockholders of Alternate Marketing Networks, Inc.
(filed as an exhibit to the Schedule 13D of Adil Khan, dated and filed with the
Securities and Exchange Commission as of August 13, 2002)
*Exhibit 4.4 Option Agreement, dated August 1, 2002, by and between Alternate
Marketing Networks, Inc., a Delaware corporation, and Adil Khan (filed as an
exhibit to the Schedule 13D of Adil Khan, dated and filed with the Securities
and Exchange Commission as of August 13, 2002)
*Exhibit 99.1 Employment Agreement, effective as of August 1, 2002, by and
between Alternate Marketing Networks, Inc., a Delaware corporation, and Adil
Khan
*Exhibit 99.2 Second Addendum to Employment Agreement, effective as of August
1, 2002, by and between Alternate Marketing Networks, Inc., a Delaware
corporation, and Phillip D. Miller
*Exhibit 99.3 Addendum to Employment Agreement, effective as of August 1, 2002,
by and between Alternate Marketing Networks, Inc., a Delaware corporation, and
Sandra J. Smith
*Exhibit 99.4 Certificate of Merger, effective as of August 1, 2002, as filed
with the Secretary of State of Delaware
*Exhibit 99.5 Certificate of Merger, effective as of August 1, 2002, as filed
with the Secretary of State of Michigan
*Incorporated by reference to Exhibits filed as a part of Form 8-K on August
14, 2002.
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.
ALTERNATE MARKETING NETWORKS, INC.
Date: August 19, 2002 By: /s/Adil Khan
Adil Khan
Chief Executive Officer
By: /s/Sandra J. Smith
Sandra J. Smith
Chief Financial Officer