United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________ to ___________
Commission file number: 0-26624
Alternate Marketing Networks, Inc.
_____________________________________________________________________________
(Name of small business issuer in its charter)
Delaware 38-2841197
_____________________________________________________________________________
(State or other jurisdiction of (I.R.S. Employer incorporation or
organization) Identification No.)
One Ionia S.W., Suite 520, Grand Rapids, Michigan 49503
_____________________________________________________________________________
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (616) 235-0698
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
par value, $0.01 per share ("Common Stock")
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.
[X]Yes [ ]No
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $20,296,838
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked prices of such common equity,
as of a specified date within the past 60 days: $1,831,341 based on shares of
Common Stock held by non-affiliates and computed by reference to the average
closing bid and asked prices of such shares on the Over the Counter Bulletin
Board (OTCBB) as of March 5, 2003.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 9,895,878 shares of Common
Stock as of March 24, 2003, after deducting 1,474,039 shares held in the
treasury
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into the part(s)
of this Form 10-KSB identified below:
Document Part
________________________________________________ ______
Definitive Proxy Statement for the 2003 Annual
Meeting of Stockholders III
TABLE OF CONTENTS
PART I
Item 1. Description of Business
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Item 6. Management's Discussion and Analysis or Plan of Operation
Item 7. Financial Statements
Item 8. Changes in and Disagreement with Accountants on Accounting and
Financial Disclosure
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Item 12. Certain Relationships and Related Transactions
Item 13. Exhibits and Reports on Form 8-K
Item 14. Controls and Procedures
SIGNATURES
INDEX OF EXHIBITS
PART I
Item 1. Description of Business.
Overview
Alternate Marketing Networks, Inc. is a business services company
serving Fortune 500 and middle market companies, through three complementary
lines of business services: software implementation and support services;
logistics process management; and advertising and marketing process
management. Our services are provided throughout the United States to
clients such as General Motors, Verizon, Raytheon, and Lone Star Steel.
Our History
We were originally organized in 1988 as a Michigan corporation with the
mission to be a single source provider of marketing solutions. In 2000, we
began expanding our services to take advantage of the wide use of internet
technologies through building and acquiring online marketing businesses. In
2002, we significantly increased our technology service capabilities by
acquiring Hencie, Inc., a Dallas-based information technology company
specializing in enterprise software implementation and support services.
With the completion of this acquisition in August 2002, we adopted a plan to
leverage the core competencies of Hencie and its management with the existing
infrastructure of the Company. In 2002, we also reincorporated in Delaware.
We currently have three operating segments based on our service offerings.
As used in this report, unless the context requires otherwise, the
terms "we," "us," "our," "Company," and "ALTM" refer to the consolidated
operations of Alternate Marketing Networks, Inc. and its direct and indirect
wholly and majority owned subsidiaries, including Alternate Postal Direct,
Inc., a Michigan corporation ("APD"), Hencie, Inc., a Delaware corporation
("Hencie"), Hencie Consulting Services, Inc., a Texas corporation ("Hencie
Consulting"), and National Home Delivery, Inc., an Illinois corporation
("NHD")or ("USSPI").
Our Services
Technology
The technology segment provides software consulting,
implementation, and support services related to Oracle Corporation's
suite of enterprise business applications to help its customers improve
their business performance by applying direct industry experience,
expertise in Oracle technology, and our in-depth knowledge of business
processes to create mission-critical business solutions for these
companies. This segment also provides enterprise resource planning,
supply chain management, customer relationship management, application
integration, and enterprise portal services. Customers of the
technology segment include companies in the manufacturing, energy, and
distribution industries. A majority of these customers are middle
market companies with annual revenues greater than $100 million. The
technology segment generates a majority of its revenue on a time and
materials fee basis in connection with the implementation of Oracle
software applications. The balance of its revenues are derived from
providing pre-implementation consulting services and post-
implementation support services. Revenues are recognized as services
are performed, primarily on a time and materials basis.
Logistics
The logistics segment delivers and tracks and verifies the
delivery of various products, including telephone directories, and
provides brokered transportation of various goods for national and
regional companies. This segment's internet-based itrackdirectoriesSM
system allows it to electronically monitor and update its customers on
the delivery status of their products. Customers of the logistics
segment include companies in the telecommunications, publishing and
packaged goods industries. Logistics segment revenues are recognized
primarily as distribution services and verification services are
completed.
Advertising and Marketing
The advertising and marketing segment forms newspaper advertising
networks and sells and places print advertising and advertising inserts
in suburban newspapers for national advertisers. This segment has been
placing advertising in suburban newspapers for over 30 years, and has
long-term relationships with its customers as well as the newspapers in
which the advertising is placed. Customers of this segment are able to
choose from approximately 1,100 newspapers in over 50 markets
nationwide and may focus advertising on specific regions and
demographic segments. This segment handles all of the customary back
room advertising functions ensuring that the ads run correctly and
provides customers with a "one-order one-bill" service. Customers in
the advertising and marketing segment include companies in the
telecommunications, automotive, travel and hospitality industries.
Revenues for this segment are recognized primarily as the print
advertising and advertising inserts are distributed with the
newspapers.
The Fulcrum Strategy
The Company has crafted the Fulcrum Strategy, to build a sustainable,
differentiated position based on its expanded capabilities as a result of the
Hencie acquisition. This strategy has been specifically designed to achieve
growth and profitability by leveraging the Company's core strengths in
business processing and enterprise software to expand into adjacent market
areas. Under this strategy, the Company intends to build a collaborative
network of solution providers centered around a common mission and brought
into this network through asset-based acquisitions and strategic alliances.
The Company intends to develop "clients for life" through a commitment to
delivering business results by applying technology to mission-critical
business processes and building brand equity by consistently earning highest
client satisfaction through exceeding expectations.
The strategy calls for creating "front-end" services to position
Alternate Marketing Networks as a specialist in selected industries and
"back-end" services for the ongoing support and management of systems and
processes that have already been implemented. This PLAN-BUILD-OPERATE
approach represents the full lifecycle of services that a client is likely to
purchase. PLAN services will include IT strategic consulting services for
discrete manufacturing, logistics, energy and other industries. BUILD
services include enterprise software consulting and implementation services
to support the PLAN layer, and OPERATE services include outsourced support
offerings for the ongoing management of processes, applications and hosting
services.
We see opportunities for acquisitions of privately held, regional, IT
boutique firms that can strategically fulfill our plan. We are targeting
firms that can bring a sustainable revenue stream of backlog and booking
opportunities with the ability to retain key clients. We expect to achieve
costs savings through operational efficiencies. We may enter into strategic
alliances with key members of the marketplace, because acquisition is not
always practicable or advantageous. We have two significant alliances we
expect to contribute significantly to our success in 2003. The first is the
Hencie's relationship with Oracle as a certified partner. The second is
USSPI's sales alliance with Papel Media to access a nationwide network of
Hispanic newspapers.
Competition
Technology
The primary competitors of the technology segment and for Oracle
solutions implementation include large accounting and consulting firms,
such as Bearing Point Consulting (formerly KPMG Consulting) and CSC,
and the service divisions of various software developers, such as
Oracle Consulting. In addition, the technology segment may compete
with its customers' own internal information technology staff and
service providers. We believe our competitive advantages include
offering a broad scope of fully integrated consulting services,
industry expertise, and our focus on developing user-friendly solutions
in a timely and cost-efficient manner.
Logistics
The primary competitors for distribution of telephone directories
in the Company's logistics segment include two large national private
companies who each have been delivering directories for regional Bell
Operating Companies for many years. Product Development Corporation
(PDC) is the largest and best example of this group. For
transportation services, the Company competes with trucking companies.
The Company competes with these types of competitors by focusing on a
more regional basis and integrating a web-based tracking system and an
easy to use trucking system with its efficient direct-to-door delivery
capabilities. We believe our competitive advantages include value
added services and reasonable pricing.
Advertising and Marketing
The primary competitors for placement of national newspaper
advertising in the Company's advertising and marketing segment are
national advertising representation (or "rep") firms. They usually
receive a fixed fee plus a sales commission from newspapers. Landon
and Associates is an example of this type of rep firm. The Company
competes with these types of companies by being resellers of newspaper
space. USSPI bills the clients and pays the newspapers. Newspapers do
not pay USSPI a fee and clients can be assured of receiving the best
newspaper rates offered. We believe our competitive advantages include
our marketing services, such as targeting, and cost-efficient pricing.
Employees
As of December 31, 2002, the Company employed approximately 91 total
persons in the following capacities:
Employment Capacity Approximate Number of Employees
Full Time Employees:
Operations and IT consulting 50
General and Administrative Support 15
Sales and Sales Support 11
Total Full Time Employees 76
Part Time Employees(1):
Operations 15
Total Part Time Employees 15
Total Employees 91
(1) The number of part time employees varies from month to month.
No employees of the Company are subject to collective bargaining
agreements. The Company does not have employment agreements with all of its
employees. We believe our employee relations are satisfactory.
Intellectual Property
We utilize the following service marks: Hencie Consulting, USSPI,
Alternate Postal Direct, APD, SMART System, itrackdirectories.com,
ilikesamples.com, iquotefreight.com, and Knowledge Bank. We believe that our
service marks have value and are an important factor in the marketing of our
business services. We intend to oppose vigorously any infringement upon our
service marks.
RISK FACTORS
This report contains forward-looking statements within the meaning of
the securities laws. Actual results and performance and the timing of
certain events and circumstances may differ materially from those described
by the forward-looking statements as a result of certain risks and
uncertainties set forth below and elsewhere in this report. You should
carefully consider the following factors, the discussion under the caption
"Cautionary Note on Forward-Looking Statements," and the other information in
this report before buying or selling any shares of our common stock. Our
business, financial condition, and operating results could be materially
adversely affected by any one or more of the following risk factors.
However, this report does not include a discussion of all risks and
uncertainties applicable to the Company. Although we have attempted to
include a discussion of the material risks known to us as of the date of this
report, there may be additional risks that do not presently know of or that
we currently believe are immaterial that could also materially adversely
affect the Company. The Company disclaims any obligation to update these
factors or to announce publicly the results of any revisions to any of the
risk factors or forward-looking statements contained in this report to
reflect any new information or future events or circumstances or otherwise.
We may not be able to fund our existing capital needs and may require
additional funding sooner than anticipated.
Our existing and anticipated capital needs are significant. Our only
existing line of credit agreements will expire on May 1, 2003 and the credit
provider under these agreements has informed us that it does not intend to
extend or renew these agreements. Although we intend to establish new
sources of credit with commercial banks or asset-based lenders, there can be
no assurance that we will be able to obtain a new line of credit or otherwise
secure necessary funding. There can be no guarantee that we will be able to
satisfy the conditions necessary to obtain new or additional financing under
the offer letter or the expanded factoring line of credit or at all or renew
or refinance our existing lines of credit which expire on May 1, 2003. In
addition, changes in our operating plans, the acceleration or modification of
our existing expansion plans, lower than anticipated revenues, increased
expenses, potential acquisitions, or other events may cause us to seek
additional financing sooner than anticipated, prevent us from achieving the
goals of our business plan or expansion strategy, or prevent our newly
acquired businesses, if any, from operating profitably. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
Our operating results could be materially adversely affected by a failure to
perform under any one or more significant contracts or a failure to collect
any one or more significant accounts receivable because we are dependent upon
a small number of total clients and contracts at any given time.
We derive a significant portion of revenue from large contracts for a
limited number of clients at any given time. During fiscal year 2002, our
largest client accounted for approximately 17% of net revenue, our second
largest client accounted for approximately 17% of net revenue, and our largest
five clients accounted for approximately 65% of net revenue. Our revenues
could be materially adversely affected if we are unable to perform our
obligations under any significant contract or we fail to collect a significant
account receivable, even if the failure to perform or collect is not our fault
or due to circumstances beyond our control. We may not be able to perform our
obligations under a contract because of software flaws, inaccurate project
time or resource estimates, or issues related to the business or personnel of
a client. Software often contains flaws, particularly when software is first
introduced or when new versions, features, or enhancements are released.
Despite internal testing by us and testing by clients, there can be no
guarantee that third-party software or software developed or customized by us
for clients will not contain serious defects or errors. Serious defects or
errors could result in liability for damages, lost revenues, and delay or
prevent us from performing our obligations under a contract.
In addition, many of our contracts are short-term and allow clients to
reduce or terminate services without notice or incurring any penalty. If
clients reduce or terminate services, our revenues may decrease and we could
have to reallocate employees and resources to other projects in order to
minimize the effects of the reduction or termination.
We are dependent on our relationships with software vendors.
Although we currently have marketing relationships and engage in joint
marketing and sales activities with a number of software vendors, there can be
no guarantee that we will be able to maintain these relationships or continue
to engage in these activities with these software vendors. Software vendors
may terminate these relationships and activities at any time. If are unable
to maintain marketing relationships or otherwise cease to enjoy the benefits
of joint marketing and sales activities with our current software vendors or
other software vendors, our ability to develop business and generate revenues
could be materially adversely affected and our business, financial condition,
and operating results could suffer.
We are also certified, accredited, licensed, or otherwise qualified by a
number of software vendors to service their software products. A failure to
maintain our existing certifications or qualifications with these software
vendors or an inability to obtain new certifications or accreditations could
materially adversely affect our ability to develop business and generate
revenues.
We also receive business leads and client referrals from a number of
software vendors. However, software vendors are not required to refer
business or clients to us and there can be no guarantee that we will continue
to receive business leads or client referrals from these software vendors. If
we cease to receive business leads or client referrals from our current
software vendors or other software vendors, our business could be materially
adversely affected.
We may not be successful in identifying and acquiring suitable acquisition
candidates, which could impede our growth and our ability to compete.
Our business plan includes the regular and systematic evaluation and
acquisition of other information technology consulting companies in new and
existing markets. There can be no assurance, however, that we will
successfully identify suitable acquisition candidates or that we will
successfully consummate any acquisitions. We may not be able to predict
whether or when any prospective acquisition candidates will become available
or the likelihood that any acquisition will be completed once negotiations
have commenced. We will also have to compete for acquisition and expansion
opportunities with companies that have substantially greater resources and
these companies may be able to outbid us for or otherwise be more attractive
to these acquisition candidates. If we fail to execute our acquisition
strategy, our revenues are likely to suffer and we may be unable to remain
competitive.
We will need additional capital to support our growth.
Our business plan and acquisition strategies will require us to obtain
additional financing within the next 12 months. We may not be able to obtain
this financing when needed, on favorable terms, or at all. If we are unable
to obtain adequate financing, we may be required to forego opportunities for
growth or obtain funds by entering into financing agreements on undesirable
terms, including agreements requiring us to pledge all of our assets or
containing covenants that restrict our operations and our ability to incur
further indebtedness. An inability to obtain adequate funding may also force
us to curtail or close operations or sell some or all of our assets including
our technology, logistics, and advertising and marketing operations.
Quarterly fluctuations and seasonality in our revenues attributable to the
budget-driven demand cycles of clients may adversely affect our operating
results and could lead to lower or volatile prices for our common stock.
Our revenues and operating results have fluctuated significantly from
period to period in the past and we expect them to continue to fluctuate
significantly from period to period in the future. Historically, our
technology segment has experienced higher revenues during the first and
second quarters and significantly lower revenues in the third and fourth
quarters. As a result, the results for one period may not be indicative of
results for other periods. We believe that this seasonality can be
attributed to the timing of contracts and orders, technology spending
conditions, major software deployments, and the budget restrictions and
cycles of clients, most of whom have calendar-based fiscal years and as a
result are more likely to incur the expenses related to software systems and
our [implementation] services during the first half of the year. The timing
of contracts and orders results in significant fluctuations in our quarterly
results as a result of the revenues and expenses associated with each client
or contract. We expect this seasonality to continue to be a factor in our
results of operations. If we are unable to predict the cyclical client
demand in a slower growth or distressed economic environment, expenses may be
disproportionate to revenues and our stock price may be adversely affected.
These quarterly fluctuations and seasonality may also cause our operating
results to fall below the expectations of securities analysts and investors,
which could cause our stock price to fall.
Our operating results may also fluctuate significantly because of
several other factors, including successful and unsuccessful acquisitions, if
any, profitability of newly acquired businesses, if any, increases or
decreases in revenues, general economic conditions, consumer confidence in
the economy, changes in consumer preferences, and competitive factors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Seasonality and Other Business Fluctuations."
We may be unable to accurately forecast revenue and to match revenue and
expenditures appropriately.
Information technology spending levels cannot be predicted with
certainty and are subject to general economic conditions, consumer confidence
in the economy, changes in consumer preferences, and competitive factors
beyond our control. This uncertainty may reduce the overall number of
projects available for bid and result in project deferrals, project scope
reductions, or limited follow-on projects for existing clients. This
environment adds greater risk and uncertainty to our revenue forecasts and to
our business plans that are based upon these forecasts. If we are unable to
predict the client demand cycles or plan accordingly in a slower growth or
distressed economic environment, expenses may be disproportionate to revenues
and our stock price may be adversely affected.
The loss of one or more members of management or key personnel could
adversely affect our operations and could lead to loss of clients and
proprietary information.
Our business, success, growth, operating results, and profitability are
dependent upon the skills, experience, efforts, performance, and abilities of
members of management and other key personnel. We depend upon members of
management and key personnel, including key sales personnel, to generate new
business and service new and existing clients. Most members of management
and key personnel are employed by us pursuant to employment agreements and
are subject to non-competition, confidentiality, and non-solicitation
agreements with us. However, if any members of management or key personnel
were to leave us or we were unable to enforce our existing agreements with
these personnel, our business, success, growth, operating results, and
profitability could suffer. If we lose any key personnel, we may also be
unable to prevent the unauthorized disclosure or use of our technical
knowledge, practices, procedures, or client lists by the former personnel.
Disclosure or use of this information could harm our business.
We may face substantial competition in attracting and retaining qualified
personnel, and may be unable to grow our business if we cannot attract and
retain qualified personnel.
Our success will depend to a significant degree upon our ability to
attract and retain highly qualified and experienced personnel who possess the
skills and experience necessary to satisfy our business and client service
needs. These personnel may be in great demand, particularly in certain
geographic areas, and are likely to remain a limited resource for the
foreseeable future. Our ability to attract and retain employees with the
requisite experience and skill depends on several factors including, our
ability to offer competitive wages, benefits, and professional growth
opportunities. To attract and retain these individuals, we will be required
to invest a significant amount of time and money. Many of the companies with
which we will compete for experienced personnel have greater financial
resources and name recognition than us. In addition, an important component
of overall compensation for our personnel will be equity. If our stock price
does not increase over time, it may be more difficult to retain personnel who
have been compensated with stock awards or options. We have in the past
experienced difficulty in recruiting sufficient numbers of qualified
information technology and sales personnel. The inability to attract, train,
and retain experienced personnel could have a material adverse effect on our
business.
Because we are significantly smaller and less established than a majority of
our competitors, we may lack the financial resources necessary to compete
effectively and sustain profitability.
We operate in competitive, fragmented industries and compete for clients
with a variety of larger and smaller companies that offer similar services.
These industries are subject to rapid technology changes and are significantly
affected by new products and services and the marketing activities of industry
participants, which may often be beyond our control. Due to the nature of our
business, we compete with companies in the technology consulting and
advertising and marketing industries. Although we primarily compete directly
with management consulting firms and, to a lesser extent, with information
technology outsourcing companies, we also compete directly and indirectly with
a great number of other consulting and advertising and marketing companies.
Many of these competitors are more established, offer more services and
features, and have a greater number of clients, locations, and employees and
significantly greater financial (based on total assets and annual revenues),
technical, marketing, public relations, name recognition, and other resources
than us.
We also expect to experience increased competition from new entrants
into the market. We may be unable to compete with full-service consulting
companies, including the consulting divisions of large international
accounting firms, if these companies decide to enter into the information
technology professional services market, because these companies may be able
to offer clients a wider range of services than us. This increased
competition may result in pricing pressures, loss of market share or loss of
clients, any of which could have an adverse effect on our business, financial
condition, operating results, and cash flows. Increased competition harm our
business. See "Description of Business - Competition."
The legal dispute with Hencie.Com, Inc. and Paul A. Tanner and the legal fees
and expenses incurred in connection with this dispute could materially
adversely affect the Company.
Although we intend to vigorously contest the claims of Hencie.Com and
Mr. Tanner totaling $2 million and pursue any counterclaims that may be
available, the business, financial condition, and operations of the Company
could be materially adversely affected by an outcome that is adverse to the
Company, including any subsidiary of the Company, with respect to any of these
claims, the legal fees and expenses associated with investigating, contesting,
and defending against these claims (whether or not these claims are
successfully pursued by Hencie.Com or Mr. Tanner), and the diversion of
management's time and resources in connection with any such investigation,
contest, or defense. See discussion of "Legal Proceedings" under Note 13 to
the consolidated financial statements of the Company in Item 7 of Part II of
this report.
Our insurance policies may not be adequate.
The systems which we implement are complex and may contain unknown or
undetected flaws or errors. Errors are frequently found during the period
immediately following implementation. Although we attempts to create systems
that are error-free and to resolve promptly any errors that are discovered,
there can be no assurance that problems will not arise or that problems will
be resolved in a timely manner, to the client's satisfaction, or at all.
Errors may result in delays in client acceptance, lost revenues, or in
litigation, and could be materially detrimental to our business reputation.
Although we have errors and omissions insurance, such insurance may not cover
every event or circumstance or instance of malfunction and coverage, if
available, may be insufficient to save us harmless from all loss. In
addition, in almost all instances coverage will require payment of a
deductible that could be material in dollar amount.
If we are unable to master and rapidly implement third-party software, our
business could suffer.
Our clients use software from a variety of third-party software vendors.
If we are unable to master and rapidly implement this software in a fully
functional manner, we may experience delays or other difficulties that could
prevent us from developing, introducing, and marketing services related to
this software and in some cases prevent us from performing under our
contracts.
If we fail to identify and successfully integrate the latest technologies into
our service offerings or otherwise keep up with an evolving industry, we may
not be able to compete successfully for clients.
We intend to provide services that employ the latest technologies. If
we fail to identify the latest technologies or fail to successfully integrate
these technologies into our service offerings, our reputation and ability to
compete for clients could suffer. If we cannot compete successfully for
clients, revenues may decrease. In addition, projects do not involve the
latest and most advanced technologies typically generate lower fees and
revenues. Because the information technology market changes rapidly, some of
the most important challenges facing us will be the need to:
? effectively use advanced technologies;
? continue to develop strategic and technical expertise;
? influence and respond to emerging industry standards and other
technological changes; and
? develop new services that meet changing client needs.
All of these challenges must be met in a timely and cost-effective
manner. If we do not succeed in effectively meeting these challenges, our
business could suffer.
Changes in technology spending or the rate of adoption of advanced
information technologies could negatively impact our operating results.
The success of our business and operating results is dependent upon
technology spending by consumers, including information technology companies
in the regions in which we operate. We market our services primarily to
companies that want to adopt information technologies in order to provide or
improve return on investment or help provide a sustainable competitive
advantage. If software products become less desirable or competitive in the
marketplace and companies decide not to integrate the latest technologies into
their businesses, or technology spending otherwise decreases, the demand for
our implementation services could decrease and our business, financial
condition, operating results, and cash flows could be materially adversely
affected. Our business could also be materially adversely affected by general
economic conditions, terrorist attacks, or the resulting cancellation or delay
of software product offerings, technology adoption or implementation,
demographic trends, consumer confidence in the economy, and changes in the
overall technology and software industries.
The price of our common stock has been highly volatile and may continue to be
highly volatile, which may adversely affect your ability to sell your shares
and our ability to raise additional capital.
A public market for our common stock has existed since 1995. The price of
our common stock has been highly volatile and may continue to be highly
volatile. For instance, from October 3, 2002 through December 31, 2002, our
common stock traded from a low of $0.26 to a high of $0.75 per share. The
price of our common stock has experienced and may continue to experience
significant volatility in response to many factors, some of which are beyond
our control and may not even be directly related to us, including:
? Changes in financial estimates or recommendations by securities
analysts regarding us or our common stock;
? Our performance and the performance of our competitors and other
companies in the technology or marketing sectors;
? Quarterly fluctuations in our operating results or the operating
results of other companies in the technology or marketing sectors;
? Additions or departures of key personnel;
? The trading volume of our common stock;
? General economic conditions and their effect on the in the technology
or advertising and marketing sectors in general; and
? Competition, natural disasters, acts of war or terrorism or other
developments affecting us or our competitors.
In addition, in recent years the stock market has experienced extreme
price and volume fluctuations, which have often been unrelated or
disproportionate to the operating performance of particular companies. This
volatility has significantly affected, and may continue to affect, the price
of our common stock and may adversely affect your ability to sell your shares
and our ability to raise additional capital. See "Market for Common Equity
and Related Stockholder Matters."
There may be sales of substantial amounts of our common stock in the near
future, which could cause our stock price to fall and could impair our
ability to raise additional capital, even if our business is doing well.
As of March 5, 2003, approximately 2,474,039 shares (or 21.8%) of our
outstanding common stock were held by a single stockholder. We are
obligated, subject to exceptions and limitations, under an agreement with
this stockholder to identify persons willing to purchase blocks of these
shares at a 15% discount from the current market price and to help this
stockholder sell these shares until this stockholder has sold all of these
shares or other conditions have been satisfied. This stockholder is not
subject to a lock-up agreement and the shares owned by this stockholder are
eligible for sale in the public market, subject to compliance with the volume
limitations and other restrictions of Rule 144 under the Securities Act. The
resulting sales, if any, of some or all of these shares, or the perception
that these sales may occur, could cause our stock price to fall and could
impair our ability to raise additional capital, even if our business is doing
well.
We may not be able to issue common stock or sell common stock in the future.
The terms of our agreement with this stockholder prohibit us from
issuing or selling common stock, subject to exceptions, without the consent
of this stockholder. If this stockholder refuses to allow us to issue or
sell common stock, our ability to raise additional capital could be impaired
and our financial condition could suffer.
Our directors and executive officers and a specific stockholder may exercise
considerable control over the Company, which may lead to conflicts with other
stockholders over corporate governance matters.
As of March 5, 2003, our directors and executive officers and a single
stockholder beneficially own collectively approximately 51% of our
outstanding common stock. As a result, these persons, acting alone or
together, may be able to significantly influence all matters requiring
stockholder approval, including the election of directors, amendments to our
certificate of incorporation or bylaws, and the approval of mergers and
acquisitions and other business combination transactions. These persons may
have interests that are different from other stockholders and may exercise
this ability in a manner that advances their best interests and not
necessarily those of other stockholders. See "Management" and "Principal and
Selling Stockholders."
Our common stock may be subject to "penny stock" rules and regulations.
Federal rules and regulations under the Exchange Act regulate the
trading of so-called "penny stocks," which generally refers to low-priced
(below $5.00), speculative securities of very small companies traded on the
OTC Bulletin Board or in the Pink Sheets. Trading, if any, in shares of our
common stock may be subject to the full range of penny stock rules. Before a
broker-dealer can sell a penny stock, these rules require the broker-dealer
to first approve the investor for the transaction and obtain from the
investor a written agreement regarding the transaction. The broker-dealer
must also furnish the investor with a document describing the risks of
investing in penny stocks. The broker-dealer must also tell the investor the
current market quotation, if any, for the penny stock and the compensation
the broker-dealer will receive for the trade. Finally, the broker-dealer
must send monthly account statements showing the market value of each penny
stock held in the investor's account. If these rules are not followed by the
broker-dealer, the investor may have no obligation to purchase the shares.
Accordingly, these rules and regulations may make it more expensive and
difficult for broker-dealers to sell shares of our common stock and
purchasers of our common stock may experience difficulty in selling such
shares in secondary trading markets.
The authorization of preferred stock, a classified board of directors,
supermajority voting requirements, and certain provisions of Delaware law
could make a takeover attempt more difficult or impossible, even if the
takeover may be beneficial to our stockholders.
Provisions of our certificate of incorporation and bylaws and Delaware law
may have the effect of deterring, delaying, or preventing a change in control
of the Company, including:
? a staggered board of directors, with three-year terms, which will
lengthen the time needed to gain control of the board of directors;
? the ability of the board of directors to issue "blank check" preferred
stock to facilitate implementation of a poison pill or change the
balance of voting control and thwart a takeover attempt and to
determine the price and other terms, including preferences and voting
rights, of those shares without stockholder approval;
? the prohibition of cumulative voting in the election of directors,
which would otherwise allow less than a majority of our stockholders to
elect director candidates;
? supermajority voting requirements for stockholders to amend provisions
of our certificate of incorporation or bylaws'
? limits on the ability of our stockholders to call special meetings of
our stockholders; and
? advance notice provisions for stockholder proposals and director
nominations.
In addition, Section 203 of the General Corporation Law of the State of
Delaware and the terms of our employment agreements and stock option plans
may discourage, delay, or prevent a change in control that may be beneficial
to stockholders.
Our operating results could be materially adversely affected by a potential
goodwill impairment charge if Hencie's operations do not improve.
In connection with the adoption of SFAS No. 142, the Company allocated
goodwill of $2,004,447 to each of its reporting units and tested this
goodwill for impairment as of January 1, 2002. The Company completed the
testing during the second quarter ending June 30, 2002. As a result, a
charge of $1,204,058 was recorded for the goodwill assigned to the logistics
reporting unit. The remaining goodwill of $800,889 at June 30, 2002 was
assigned to the advertising and marketing reporting unit. The fair market
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 Company has
concluded that no impairment has occurred for the advertising and marketing
reporting unit as of December 31, 2002.
The goodwill of approximately $7 million that arose from the Hencie
acquisition will be tested for impairment at least annually beginning in
2003. Hencie has been experiencing losses since the acquisition and further
improvements in operations are required. However, the Company believes that
the estimated fair value of the Hencie reporting unit has not decreased
significantly since the acquisition; therefore, no adjustment should be made
to goodwill as of December 31, 2002.
Item 2. Description of Property.
The Company does not have any materially important property leases. All
of the office space and other facilities currently leased by the Company
could be replaced by the Company with substantially equivalent facilities at
similar cost without great difficulty.
Item 3. Legal Proceedings.
The information required by this Item 3 is incorporated by reference
from Note 13 to the consolidated financial statements of the Company in Item
7 of Part II of this report.
We are not aware of any other pending or contemplated legal proceeding
to which the Company is or may be a party or any assets of the Company are or
may be subject other than (i) the legal proceedings described in this report,
(ii) routine litigation incidental to the business of the Company, and (iii)
legal proceedings involving claims for damages involving amounts (exclusive
of interest and costs) not exceeding 10% of the current assets of the
Company, if any.
From time to time, the Company may be subject to routine litigation and
other legal proceedings incidental to the business of the Company. The
business, financial condition, and operations of the Company could be
materially adversely affected by an outcome that is adverse to the Company
with respect to any such litigation or legal proceedings or legal fees or by
expenses related to investigating, contesting, and defending against the
claims related to such litigation or legal proceedings (whether or not the
Company is successful in defending against such claims), and the diversion of
the time and resources of management of the Company in connection with such
litigation or legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Our Common Stock is currently traded on the OTC Bulletin Board under the
symbol "ALTM.OB." The following table sets forth the quarterly high and low
bid prices for our Common Stock (which is its only class of security
outstanding) for each quarter within the last two fiscal years, as reported
in the Nasdaq SmallCap Market and the OTC Bulletin Board. These quotations
reflect inter-dealer prices, without retail mark-up, mark-down, or commission
and may not represent actual transactions.
Bid Price
Low High
Year ended December 31, 2002:
First quarter . . . . . . . . . . . . . . . 0.650 1.750
Second quarter . . . . . . . . . . . . . . 0.710 1.450
Third quarter . . . . . . . . . . . . . . . 0.600 0.950
Fourth quarter . . . . . . . . . . . . . . 0.260 0.750
Year ended December 31, 2001:
First quarter . . . . . . . . . . . . . . . 1.063 1.625
Second quarter . . . . . . . . . . . . . . 0.950 1.210
Third quarter . . . . . . . . . . . . . . 0.900 1.190
Fourth quarter . . . . . . . . . . . . . . 0.600 1.550
On March 5, 2003, the high and low bid prices for our common stock were
$.31 and $.10, respectively and there were approximately 56 holders of record
of our common stock. Many of the shares of our common stock are held by
brokers and other institutions on behalf of stockholders. As of March 5,
2003, we estimated the number of beneficial owners to be approximately 400.
Dividends
We paid our first cash dividend on our common stock on January 22, 2002
and our second on July 29, 2002. Future dividend policy will be determined
by the board of directors based upon our earnings, if any, the Company's
capital needs and other relevant factors. The Company currently has no plans
to pay dividends.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information, as of December 31, 2002,
regarding (i) the number of securities to be issued upon exercise of
outstanding options, warrants, and rights, (ii) the weighted average exercise
price of outstanding options, warrants and rights, and (iii) the number of
securities remaining available for future issuance with respect to
compensation plans (including individual compensation arrangements) under
which equity securities of the Company are authorized for issuance, including
all compensation plans previously approved by the stockholders and all
compensation plans not previously approved by the stockholders.
Equity Compensation Plan Information
Number of securities to Weighted average
be issued upon exercise exercise price of Number of securities
of outstanding options, outstanding options, remaining available
Plan Category warrants and rights warrants and rights for future issuance
Equity compensation plans
approved by security
holders (1) (2) 170,100 $2.84 1,369,900
Equity compensation plans
not approved by security
holders not applicable not applicable not applicable
Total 170,100 $2.84 1,369,900
(1) 1995 Long-Term Incentive and Stock Option Plan includes 1,500,000 authorized
shares, 7,500 options exercised, and 1,369,900 available as of
December 31, 2002.
(2) 1995 Outside Directors and Advisors Stock Option Plan was terminated on
July 2, 2002 and had 47,500 options outstanding as of December 31, 2002.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operation
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including, without limitation,
in the discussions under the captions "Business," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and elsewhere in this report. Any and all statements contained
in this report that are not statements of historical fact may be deemed
forward-looking statements. Terms such as "may," "might," "will," "would,"
"should," "could," "project," "estimate," "pro forma," "predict,"
"potential," "strategy," "anticipate," "attempt," "develop," "plan," "help,"
"believe," "continue," "intend," "expect," "future," and similar terms and
terms of similar import (including the negative of any of the foregoing) may
be intended to identify forward-looking statements. However, not all
forward-looking statements may contain one or more of these identifying
terms. Forward-looking statements in this report may include, without
limitation, statements regarding (i) a projection of revenues, income
(including income loss), earnings (including earnings loss) per share,
capital expenditures, dividends, capital structure, or other financial items,
(ii) the plans and objectives of management for future operations, including
plans or objectives relating to our products or services, (iii) our future
economic performance, including any such statement contained in a discussion
and analysis of financial condition by management or in the results of
operations included pursuant to the rules and regulations of the Securities
and Exchange Commission, (iv) the assumptions underlying or relating to any
statement described in subparagraphs (i), (ii), or (iii).
The forward-looking statements are not meant to predict or guarantee
actual results, performance, events, or circumstances and may not be realized
because they are based upon our current projections, plans, objectives,
beliefs, expectations, estimates, and assumptions and are subject to a number
of risks and uncertainties and other influences, many of which we have no
control over. Actual results and the timing of certain events and
circumstances may differ materially from those described by the forward-
looking statements as a result of these risks and uncertainties. Factors
that may influence or contribute to the inaccuracy of the forward-looking
statements or cause actual results to differ materially from expected or
desired results may include, without limitation, inability to obtain adequate
financing, insufficient cash flows and resulting illiquidity, dependence upon
software vendors or significant customers, inability to expand our business,
lack of diversification, sales volatility or seasonality, increased
competition, changing customer preferences, results of arbitration and
litigation, stock volatility and illiquidity, failure to successfully
reorient the Company as a technology/marketing services company, failure to
implement our business plans or strategies, failure to attract acquisition
targets, or ineffectiveness of our marketing program to develop and
capitalize on strategic alliances. A description of some of the risks and
uncertainties that could cause our actual results to differ materially from
those described by the forward-looking statements in this report appears
under the caption "Risk Factors" and elsewhere in this report. Because of
the risks and uncertainties related to these factors and the forward-looking
statements, readers of this report are cautioned not to place undue reliance
on the forward-looking statements. The Company disclaims any obligation to
update these forward-looking statements or to announce publicly the results
of any revisions to any of the forward-looking statements contained in this
report to reflect any new information or future events or circumstances or
otherwise.
Readers should read this report and the following discussion and
analysis in conjunction with the discussion under the caption "Risk Factors"
in this report, our Condensed Consolidated Financial Statements and the
related notes thereto included in Item 7 of Part II of this report, and other
documents filed by the Company from time to time with the Securities and
Exchange Commission.
Year in Review
During 2002 we focused on improving the efficiency, profitability and
revenue stability of our two existing business segments while we searched for
an acquisition to complement the current base of business with higher gross
margins and greater growth potential. We also paid two special cash
dividends for which a significant portion would be treated for shareholders'
income tax purposes as a return of capital.
In early 2002, in connection with our efforts to improve efficiency of
the existing segments, we implemented a proprietary software system for the
advertising and marketing segment, referred to as the SMART SystemSM, to
maintain this segment's unique database, to produce and track insertion
orders, and to produce invoices for the customers. We also negotiated an
extension to provide additional services in the logistics segment under a
contract with a major telephone directory publisher until 2006.
In late 2002, we negotiated an amendment to an agreement to eliminate
unnecessary fixed monthly consulting fees and expenses in connection with our
efforts to improve the efficiency and profitability of the logistics segment.
On April 9, 2002 we entered into an agreement to acquire Hencie and
consummated the acquisition on August 1, 2002. Five months of operating
results of Hencie are included in the financial statements for fiscal 2002.
Immediately after the acquisition, we began an integration and cost savings
plan between the newly acquired technology segment and the other existing
business segments. The Company also began "The Fulcrum Strategy" which calls
for future growth and potential additional acquisitions in 2003.
Results of Operations
Fiscal Year Ended December 31, 2002 Compared to Fiscal Year Ended December
31, 2001.
Results of operations for the fiscal years ended December 31, 2002 and
2001 are as follows:
2002 2001
------ ------
Net revenues. . . . . . . . . . . . . $20,296,838 $16,626,151
Cost of revenues. . . . . . . . . . . 14,986,673 12,837,911
----------- -----------
Gross profit. . . . . . . . . . . . . 5,310,165 3,788,240
----------- -----------
Selling, general and
administrative expenses. . . . . . . 5,672,350 4,536,618
----------- -----------
Loss from operations. . . . . . . . . (362,185) (748,378)
----------- -----------
Loss before accounting change . . . . (339,888) (404,871)
----------- -----------
Cumulative effect of accounting
change . . . . . . . . . . . . . . . (1,204,058) --
----------- -----------
Net loss. . . . . . . . . . . . . . . $(1,543,946) $ (404,871)
=========== ===========
Per share - basic and diluted:
Loss before accounting change $ (0.05) $ (0.09)
=========== ===========
Net loss $ (0.24) $ (0.09)
=========== ===========
Weighted average number of shares
outstanding basic and diluted. . . . 6,380,082 4,612,805
SEE "PRO FORMA RESULTS OF OPERATIONS" FOR COMPARABLE HENCIE DATA.
The following table sets forth select consolidated operating data of
the Company expressed as a percentage of net revenues for the years ended
December 31, 2002 and 2001:
2002 2001
-------- --------
Net revenues. . . . . . . . . . . . . 100.0 % 100.0 %
Gross profit. . . . . . . . . . . . . 26.2 % 22.8 %
Operating expenses. . . . . . . . . . 28.0 % 27.3 %
Operating loss. . . . . . . . . . . . (1.8)% (4.5)%
Net loss. . . . . . . . . . . . . . . (7.6)% (2.4)%
======== ========
NET REVENUES:
For the years ending
December 31,
----------------------
2002 2001 % change
----------- ----------- --------
Technology $ 3,073,881 $ -- --
Advertising and Marketing 13,322,883 10,893,681 22.3 %
Logistics 3,900,074 5,732,470 (32.0)%
----------- ----------- --------
Total Net Revenues $20,296,838 $16,626,151 22.1 %
=========== =========== ========
The net revenues increase of $3,670,687 for 2002 as compared to 2001 was
primarily due to the addition of the technology segment through the
acquisition of Hencie, Inc., which accounted for revenues of $3,073,881 from
August 1, 2002 to December 31, 2002. The advertising and marketing revenues
increased $2,429,202 in 2002 as the Company added new customers. The
logistics revenues decreased by $1,832,396 in both the transportation and the
directory distribution areas as the Company focused its efforts on its larger
and more profitable customers. While revenues declined due to this focus,
profitability in this segment is expected to remain at approximately the same
level.
GROSS PROFIT:
For the years ending
December 31,
----------------------
2002 2001 % change
----------- ----------- --------
Technology $ 1,380,497 $ -- -- %
Advertising and Marketing 2,123,280 1,757,166 20.8 %
Logistics 1,806,388 2,031,074 (11.1)%
----------- ----------- --------
Total Gross Profit $ 5,310,165 $ 3,788,240 40.2 %
=========== =========== ========
GROSS PROFIT %:
For the years ending
December 31,
----------------------
2002 2001 change
----------- ----------- --------
Technology 44.9 % -- --
Advertising and Marketing 15.9 % 16.1 % (0.2)%
Logistics 46.3 % 35.4 % 10.9 %
----------- ----------- --------
Total Gross Profit % 26.2 % 22.8 % 3.4 %
=========== =========== ========
The gross profit increase of $1,521,925 was primarily due to the
addition of the technology segment, which generated gross profits of
$1,380,497 from August 1, 2002 through December 31, 2002, and led to the
overall increase in gross profit percentage for the Company. In addition, as
the Company focused in its logistics segment on its primary customers through
its decision to reduce the number of smaller deliveries it performs, and
selected specific geographic areas to cover, it was able to generate
efficiencies, which enabled it to increase the gross profit percentage in
this segment. In addition, higher unemployment levels provided for an
increased availability of labor, thereby keeping the costs down in the
logistics segment. While revenues in the logistics segment decreased by 32%,
gross profits percentage increased by 10.9%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
For the years ending
December 31,
----------------------
2002 2001 % change
----------- ----------- --------
Total S,G&A Expenses $ 5,672,350 $ 4,536,618 25.0 %
=========== =========== ========
Selling, general and administrative expenses increased in 2002 primarily
due the addition of the technology segment. Total selling, general and
administrative expenses increased $1,135,732, with approximately $1.4 million
attributable to the technology segment for the period August 1, 2002 to
December 31, 2002. While the Company continues to hold down most of its
overhead costs, costs (such as legal, accounting, and directors and officers
liability insurance) attributable to being a public company continue to rise
significantly. The increase in this area in 2002 was approximately $128,000.
After excluding the increase from the technology segment of $1.4 million and
the increase of public company costs of $128,000, other costs decreased
approximately $380,000. In addition, the Company recognized goodwill
amortization expense in 2001 of approximately $150,000, compared to no
goodwill amortization expense in 2002 due to the accounting change for
adopting SFAS No. 142, which eliminates goodwill amortization.
OTHER INCOME (EXPENSE), NET:
For the years ending
December 31,
----------------------
2002 2001 % change
----------- ----------- --------
Interest income $ 15,352 $ 125,847 (87.8)%
Interest expense (110,069) -- -- %
Gain on asset disposal 292 -- -- %
----------- ----------- --------
Total Other Income (Expense), Net $ (94,425) $ 125,847 (175.0)%
=========== =========== ========
Interest income decreased $110,495 and interest expense increased
$110,069 during 2002 as compared to 2001, due to the decrease in cash
available for investing and the borrowings made on the Company's financing
arrangements, including those obtained in the Hencie acquisition. Interest
income was higher in 2001 due to temporary investment of proceeds from the
sale of the offline sampling division, which was sold at the end of 2000.
The change in cash availability for investing was largely attributable to the
dividends paid during 2002. In addition, the increase in interest expense
was largely attributable to the debt assumed as part of the Hencie
acquisition (technology segment).
INCOME TAXES:
During 2002 the Company recorded a federal income tax benefit of
$128,282 and state income tax expense of $11,560. During 2001 the Company
recorded a federal income tax benefit of $220,032 and state income tax
expense of $2,372.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE:
In connection with the adoption of SFAS No. 142, the Company allocated
goodwill of $2,004,947 to each of its reporting units and tested this
goodwill for impairment as of January 1, 2002. The Company completed the
testing during the second quarter ending June 30, 2002. As a result, a
charge of $1,204,058 was recorded to goodwill assigned to the logistics
reporting unit. The fair market 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.
Three Months Ended December 31, 2002 Compared to Three Months Ended December
31, 2001.
The results of the fourth quarter of 2002 as compared to the same period
in 2001 is summarized as follows:
For the three months ending,
2002 2001
------ ------
Net revenues. . . . . . . . . . . . . $ 6,626,763 $ 4,340,891
Cost of revenues. . . . . . . . . . . 4,773,793 3,272,392
----------- -----------
Gross profit. . . . . . . . . . . . . 1,852,970 1,068,499
Selling, general and
administrative expenses. . . . . . . 1,940,490 1,236,676
----------- -----------
Operating loss. . . . . . . . . . . . (87,520) (168,177)
----------- -----------
Net income (loss) . . . . . . . . . . $ (38,990) $ 33,137
=========== ===========
Income (loss) per share:
Basic and diluted . . . . . . . . $ (0.00) $ 0.01
=========== ===========
Weighted average number of shares
outstanding basic and diluted . . . 8,895,878 4,586,005
The following table sets forth select consolidated operating data of
the Company expressed as a percentage of revenues for the fourth quarters
ended December 31, 2002 and 2001:
2002 2001
-------- --------
Net revenues. . . . . . . . . . . . . 100.0 % 100.0 %
Gross profit. . . . . . . . . . . . . 28.0 % 24.6 %
Operating expenses. . . . . . . . . . 29.3 % 28.5 %
Operating loss. . . . . . . . . . . . (1.3)% (3.9)%
Net income (loss) . . . . . . . . . . (0.6)% 1.0 %
======== ========
NET REVENUES:
For the three months ending
December 31,
----------------------
2002 2001 % change
----------- ----------- --------
Technology $ 1,797,230 $ -- --
Advertising and Marketing 3,745,748 2,907,500 28.8 %
Logistics 1,083,785 1,433,391 (24.4)%
----------- ----------- --------
Total Revenues $ 6,626,763 $ 4,340,891 52.7 %
=========== =========== ========
The net revenues increase in the fourth quarter of 2002 as compared to
the same period in 2001 of $2,285,872 was primarily due to the addition of
the technology segment, which generated $1,797,230 in net revenues during the
fourth quarter of 2002. The advertising and marketing revenues increased
$838,248 as the Company was able to add new clients. The logistics revenues
decreased in both the transportation area and the directory distribution area
as the Company began in the beginning of 2002 to focus its efforts on its
larger and more profitable customers, as well as specific geographic areas.
GROSS PROFIT:
For the three months ending
December 31,
----------------------
2002 2001 % change
----------- ----------- --------
Technology $ 772,903 $ -- -- %
Advertising and Marketing 557,242 405,487 37.4 %
Logistics 522,825 663,012 (21.1)%
----------- ----------- --------
Total Gross Profit $ 1,852,970 $ 1,068,499 73.4 %
=========== =========== ========
GROSS PROFIT %:
For the three months ending
December 31,
----------------------
2002 2001 change
----------- ----------- --------
Technology 43.0 % -- --
Advertising and Marketing 14.9 % 13.9 % 1.0 %
Logistics 48.2 % 46.3 % 1.9 %
----------- ----------- --------
Total Gross Profit % 28.0 % 24.6 % 3.4 %
=========== =========== ========
The gross profit increase of $784,471 for the fourth quarter of 2002 as
compared to the fourth quarter of 2001 was largely attributable to the
addition of the technology segment, which generated $772,903 in gross profits
during the fourth quarter of 2002. The overall gross profit percentage
increase of 3.4% was partially due to the technology segment as well as
increased margins in the advertising and marketing segment and the logistics
segment. Quarterly gross profits will continue to fluctuate based on the mix
of total revenues contributed by each segment, and the various gross profit
levels that they contribute.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
For the three months ending
December 31,
----------------------
2002 2001 % change
----------- ----------- --------
Total S,G&A Expenses $ 1,940,490 $ 1,236,676 56.9 %
=========== =========== ========
Selling, general and administrative expenses increased by $703,814 in
fourth quarter of 2002 primarily due to the addition of the technology
segment, which accounted for approximately $770,000. In addition, legal and
accounting increased by approximately $46,000 in the 2002 quarter as compared
to the same quarter the previous year. The Company was able to experience
some savings in personnel costs due to the planned reduction in revenues from
transportation and directory distribution (logistics segment).
OTHER INCOME (EXPENSE), NET:
For the three months ending
December 31,
----------------------
2002 2001 % change
----------- ----------- --------
Interest income $ 280 $ 20,775 (99.0)%
Interest expense (70,698) -- --
----------- ----------- --------
Total Other Income (Expense), Net $ (70,418) $ 20,775 (439.0)%
=========== =========== ========
Interest income decreased $20,495 and interest expense increased
$70,698, due to the decrease in cash available for investing and the
borrowings made on the Company's financing arrangements. Interest income was
higher in 2001 due to temporary investment of proceeds from the sale of the
offline sampling division, which was sold at the end of 2000. The change in
cash availability for investing was largely attributable to the dividends
paid during 2002. The increase in interest expense was largely attributable
to the debt added as part of the Hencie acquisition (technology segment).
INCOME TAXES:
The effective income tax rate in the fourth quarter of 2001 was affected
by the utilization of net operating loss carryforwards and changes in certain
deferred tax assets, which had been previously fully utilized.
PRO FORMA RESULTS OF OPERATIONS
The unaudited pro forma combined historical results, as if Hencie had
been acquired at the beginning of 2001, are provided as follows:
For the years ending
December 31,
----------------------------
2002 2001
------------- -------------
(unaudited)
Revenues $25,675,358 $28,563,613
Loss from continuing operations ** (1,218,550) (498,822)
Net loss ** $(1,218,550) $ (498,822)
Basic and diluted loss per share $ (0.14) $ (0.06)
**The 2002 period excludes a charge for the cumulative effect of accounting
change of $1,204,058 and one-time expenses of $563,150 associated with the
Hencie acquisition. The 2001 period includes a pro forma adjustment of
$150,000 for the elimination of goodwill amortization per SFAS No. 142.
The pro forma results are not necessarily indicative of what actually
would have occurred if the acquisition had been completed as of the beginning
of each of the fiscal periods presented, nor are they necessarily indicative
of future consolidated results.
The pro forma revenues included above from the Hencie acquisition were
$8,452,401 and $11,937,462 for the years ending December 31, 2002 and 2001,
respectively. This decrease of $3,485,061 (29%) was largely attributable to
reduced capital expenditures by U.S. companies. The 2002 period includes the
actual revenues subsequent to the acquisition of $3,073,881 and $5,378,520
prior to the acquisition.
The increase of $719,728 in net loss was largely attributable to the
reduced revenues above, which produced a decrease in gross profit of
$1,978,435. The pro forma net loss included above attributable to Hencie was
$(1,558,792) and $(243,951) for the years ending December 31, 2002 and 2001,
respectively. The pro forma net loss for 2002 of $1,218,550 includes an
adjustment for the elimination of one-time expenses of $563,150 associated
with the Hencie acquisition. Hencie was able to reduce its operating
expenses by $942,963 in 2002 as compared to 2001, despite the expenses
incurred from the acceleration of stock option expense triggered by the
acquisition, as well as additional personnel costs caused by the inability to
utilize full-time employees for billable services, known as "bench time".
Subsequent to the acquisition, the Company has reduced personnel costs and
has been evaluating human resource policies and practices, such as bench time
and insurance benefits, to look for additional cost reductions.
INFLATION
The Company believes that inflation has not had a material impact on its
operations or liquidity to date.
SEASONALITY AND OTHER BUSINESS FLUCTUATIONS
Although the logistics segment and the advertising and marketing segment
experience some seasonality in operations corresponding with holiday
advertising, such variations have not been material to the overall results of
operations of the Company. Revenues from the delivery of telephone
directories also fluctuate quarterly with the contractual delivery schedules
of the Company's customers and vary during the course of the year.
Revenues and operating results from the technology segment have
fluctuated significantly in the past. The technology segment has
historically experienced greater revenues during its first and second fiscal
quarters, and significantly lower revenues in its third and fourth fiscal
quarters. Accordingly, although a comparison of any given fiscal quarter to
the same fiscal quarter of a previous year may be meaningful, other period-
to-period comparisons, including comparisons of fiscal quarters in the same
fiscal year may not be meaningful.
This fluctuation between quarters is attributable to the project cycles
of customers of the technology segment, most of whom have calendar-based
fiscal years and are more likely to start project cycles during the first
half of the year. Further, most of the technology segment's expenses,
including expenses associated with its employees, are relatively fixed in the
short-term, several other factors can cause significant variations in the
quarterly operating results, including:
- fluctuations in the number of customer projects it is awarded;
- cancellations or delays by its customers of planned projects;
- its employee utilization rate; and
- number of billable days in a given quarter.
The Company believes that the technology segment will experience similar
fluctuations in operations in the future. If the Company is unable to
predict the cyclical customer demand in a slower growth or distressed
economic environment, expenses may be disproportionate to and/or exceed
revenues.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operations and working capital
needs from operating cash flows. However, during the year ended December 31,
2002, the Company's cash decreased $3,232,959. This decrease was primarily
attributable to the payments of two dividends totaling $2,751,663 and the
payments of certain liabilities assumed by the Company in connection with the
Hencie acquisition. The Company currently has no plans to pay dividends.
Since the payment of the two dividends and the acquisition, the Company has
funded its operations and working capital needs from operating cash flows and
borrowings.
Net cash used in financing activities of $3,222,617 for the year ended
December 31, 2002 included payments of dividends of $2,751,663. In addition,
the Company had net bank borrowings of $1,125,000. The Company also made net
payments on notes payable assumed with the Hencie acquisition totaling
$1,595,954 during the five-month period subsequent to the acquisition (August
1, 2002 through December 31, 2002).
Net cash provided by operating activities was $244,528 for the year
ended December 31, 2002. This was largely attributable to the increase in
accounts payable. This made cash available to finance other operating
activities such as paying liabilities assumed with the Hencie acquisition,
including a payment to the Internal Revenue Service of approximately
$609,000.
The liabilities assumed by the Company in connection with the Hencie
acquisition include short-term as well as long-term obligations. The short-
term obligations include "accounts payable, other" to former vendors, as well
as expenses related to the acquisition itself. As of December 31, 2002, the
liabilities included a long-term note requiring monthly payments of $60,000
with interest at 8% and a maturity date of April 2004 ("Drawbridge Note") and
a Small Business Administration loan requiring monthly payments of $2,604
with interest at 9.75% and a maturity date of March 2006. As of December 31,
2002, the balance outstanding on the two liabilities was $1,084,242, of which
$396,311 was long-term and $687,931 was the current portion. The current
portion of long-term debt includes other notes assumed from Hencie in the
amount of $165,366. On February 18, 2003, the Company entered into an
agreement for settlement of the Drawbridge Note. The agreement provided for
a cash payment of $120,000, issuance of 2,474,309 shares of the Company's
Common Stock, registration rights for such shares, and an obligation for the
Company to repurchase $100,000 of the Company's common stock from Drawbridge
annually for three years beginning February 18, 2004. The Company believes
that this debt settlement significantly improved the liquidity position of
the Company, as approximately $1 million of liabilities were converted
primarily to common stock and additional paid in capital; therefore,
eliminating the requirement for future monthly payments.
The Company has agreements with a bank providing for a $1,000,000 line
of credit (the "Advertising and Marketing Accounts Receivable Credit
Facility") to National Home Delivery, Inc., an Illinois corporation and a
wholly owned subsidiary of the Company, and a $500,000 line of credit (the
"Logistics Accounts Receivable Credit Facility") to Alternate Postal Direct,
Inc., a Michigan corporation and a wholly owned subsidiary of the Company
("APD"). Available borrowings are based on sixty-five percent (65%) of
accounts receivable not more than ninety (90) days old and subject to certain
other conditions and restrictions, including, without limitation, restrictive
financial covenants related to the working capital and tangible net worth of
the Company. The line of credit agreements are secured by substantially all
of the assets of the Company. Borrowings of $1,125,000 as of December 31,
2002, under the line of credit agreements accrue interest at the bank's prime
rate (4.25% as of December 31, 2002). As of March 4, 2003, borrowings in the
amount of approximately $900,000 and $225,000 were outstanding under the
Advertising and Marketing Accounts Receivable Credit Facility and Logistics
Accounts Receivable Credit Facility, respectively. As of March 4, 2003,
credit in the amount of $100,000 and $21,000 was available under the
Advertising and Marketing Accounts Receivable Credit Facility and Logistics
Accounts Receivable Credit Facility, respectively. The line of credit
agreements expire on May 1, 2003. As a result of the Hencie acquisition, the
Company is currently not in compliance with all of the debt covenants under
the line of credit agreements. The bank has informed the Company that it
does not intend to demand payment prior to May 1, 2003, but it does not
intend to renew the line of credit agreements at that time. On March 25,
2003, the Company received an offer letter for an expanded factoring line of
credit, subject to certain conditions, including, without limitation, the
negotiation and execution of final legal documents, through March 2004 from
the lender of the existing "Technology Accounts Receivable Credit Facility"
(see below), and continues to seek a more cost effective replacement to the
line of credit agreements. See "Risk Factors".
Hencie has a financing agreement with a lender providing for the sale of
its accounts receivable to the lender (the "Technology Accounts Receivable
Credit Facility") up to $750,000. The eligibility of accounts receivable for
sale is subject to certain conditions and restrictions, including, without
limitation, concentration restrictions and verification approvals of the
accounts receivable by the lender. The sales of accounts receivables under
the Technology Accounts Receivable Credit Facility are collateralized by
substantially all of the assets of Hencie. Accounts receivable that are sold
and remain unpaid under the Technology Accounts Receivable Credit Facility
accrue interest at 2% plus the prime rate as published in the Wall Street
Journal, and as of December 31, 2002, the balance outstanding was $269,508.
As of March 3, 2003, borrowings in the amount of approximately $308,367 were
outstanding under the Technology Accounts Receivable Credit Facility with
$89,441 available for additional borrowing. The majority of Hencie's
customer contracts are terminable upon 30 days notice.
The Company believes that the funds available under the current and
proposed financing arrangements and estimated operating cash flows will be
sufficient to fund the operations and working capital and capital expenditure
requirements for at least the next twelve (12) months. There can be no
assurance, however, that a failure to secure the proposed financing
arrangements, changes in the operating plans, the acceleration or
modification of expansion plans, lower than anticipated revenues, increased
expenses, potential acquisitions or other events will not cause the Company
to seek additional financing sooner than anticipated, prevent the Company
from achieving the goals of our expansion strategy, force the closure of
unprofitable segments or portions thereof, or prevent the Company from
operating profitably. In such case, there can be no assurance that any
additional financing will be available on terms acceptable to the Company or
at all.
In addition, the following are contractual cash obligations of the
Company as of December 31, 2002:
Cash Obligations Due by Year
Total 2003 2004 2005 2006
Operating leases $1,082,258 $ 477,260 $457,224 $142,036 $ 5,738
Notes payable, bank * 1,125,000 1,125,000 -- -- --
Notes payable, factor * 269,508 269,508 -- -- --
Long-term debt ** 386,922 316,614 31,248 31,248 7,812
---------- ---------- -------- -------- --------
$2,863,688 $2,188,382 $488,472 $173,284 $ 13,550
========== ========== ======== ======== ========
*The Company intends to replace these notes payable with another source of
revolving credit. See above for further details.
**The Drawbridge note payable was settled in February 2003 for cash of
$120,000 and the issuance of the Company's common stock, and obligations for
the Company to repurchase $100,000 of the Company's common stock annually for
three years beginning in 2004. The non-cash portion of this settlement of
$871,734 is not included in this schedule.
In addition to the above, the Company estimates that the past due
payables as of December 31, 2002 in the amount of $484,221 will be paid off
over the next three years.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2002 the Financial Accounting Standards Board ("FASB") approved
for issuance SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities." SFAS No. 146 requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. This statement
is effective for fiscal years beginning after December 31, 2002. The Company
does not expect the adoption of SFAS No. 146 to have a material effect on the
Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation-Transition and Disclosure." SFAS No. 148 amends SFAS No.
123, to provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements
of SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
transition guidance and annual disclosure provisions of SFAS No. 148 are
effective for fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15, 2002.
As the Company did not make a voluntary change to the fair value based method
of accounting for stock-based employee compensation in 2002, the adoption of
SFAS No. 148 did not have a material impact on the Company's financial
position and results of operations.
CRITICAL 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 flow
are used in the periodic analyses of the recoverability 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.
The Company currently has not recorded the value of the deferred tax
asset on the balance sheet due to the uncertainty of its utilization prior to
the expiration of the related net operating loss carryforwards.
As of December 31, 2002 and 2001, respectively, the allowance for bad
debts was $150,000 and $100,000. This increase was due to the increase in
accounts receivable associated with the Hencie acquisition. The Company
periodically reviews accounts receivable balances for all customers to
allocate an estimate to each customer of an amount, which may potentially be
uncollectible. These estimates are then aggregated and compared to the total
allowance and adjustments made if necessary.
In connection with the adoption of SFAS No. 142, the Company allocated
goodwill of $2,004,447 to each of its reporting units and tested this
goodwill for impairment as of January 1, 2002. The Company completed the
testing during the second quarter ending June 30, 2002. As a result, a
charge of $1,204,058 was recorded for the goodwill assigned to the logistics
reporting unit. The remaining goodwill of $800,889 at June 30, 2002 was
assigned to the advertising and marketing reporting unit. The fair market
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 Company has
concluded that no impairment has occurred for the advertising and marketing
reporting unit as of December 31, 2002.
The goodwill of approximately $7 million that arose from the Hencie
acquisition will be tested for impairment at least annually beginning in
2003. Hencie has been experiencing losses since the acquisition and further
improvements in operations are required. However, the Company believes that
the estimated fair value of the Hencie reporting unit has not decreased
significantly since the acquisition; therefore, no adjustment should be made
to goodwill as of December 31, 2002.
OUTLOOK FOR THE FUTURE
The Company will continue in 2003 to explore options and opportunities
to maximize shareholder value under the Fulcrum Strategy. The business plan
for 2003 includes a number of strategic initiatives to achieve growth and
profits by addressing the emerging trends, especially, in the technology
segment of our business. These new initiatives include growth through
promotion and positioning of our current IT services, as well as strategic
alliances and asset based acquisitions to extend our service offerings.
The Company has seen improvement in its sales pipeline for the
technology segment as a result of promoting our services through new direct
marketing programs. We expect to see results from these efforts in the
second half of the year 2003.
We will continue to address selling, general and administrative expenses
throughout the company and have combined the sales and client management
functions of the technology segment into a single role of client development
manager to reduce costs.
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report 34
Consolidated Balance Sheets 35
Consolidated Statements of Operations 36
Consolidated Statements of Changes in
Shareholders' Equity 37
Consolidated Statements of Cash Flows 38
Notes to Consolidated Financial Statements 39-55
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Alternate Marketing Networks, Inc.:
We have audited the accompanying consolidated balance sheet of Alternate
Marketing Networks, Inc. and subsidiaries (the Company) as of December 31,
2002, and the related consolidated statements of operations, shareholders'
equity, and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit. The
financial statements of the Company for the year ended December 31, 2001,
were audited by other auditors whose report dated March 15, 2002, expressed
an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, such 2002 financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
2002, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 4 to the financial statements, the Company changed its
method of accounting for goodwill as of January 1, 2002, as required by SFAS
No. 142, "Goodwill and Other Intangible Assets".
DELOITTE & TOUCHE LLP
Dallas, Texas
March 26, 2003
ALTERNATE MARKETING NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
2002 2001
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 550,123 $ 3,783,082
Accounts receivable, trade, net 3,948,567 3,063,875
Prepaid expenses and other assets 141,130 160,005
Refundable federal income tax 308,282 180,000
------------ ------------
Total current assets 4,948,102 7,186,962
Property and equipment, net 210,727 144,317
Goodwill, net 7,973,681 2,004,947
------------ ------------
Total assets $ 13,132,510 $ 9,336,226
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, bank and other $ 1,394,508 $ --
Current portion of long-term debt 308,615 --
Accounts payable, trade 3,012,237 1,596,613
Accounts payable, other 484,221 --
Accrued liabilities 992,425 200,277
Dividend payable -- 2,293,052
------------ ------------
Total current liabilities 6,192,006 4,089,942
Long-term debt, less current portion 940,993 --
Commitments and contingencies (Note 13)
Shareholders' equity:
Common stock-$.01 par value (no par value
in 2001), 50,000,000 authorized shares;
8,895,878 and 4,586,005 shares issued
and outstanding at December 31,
respectively 88,958 10,417,243
Additional paid in capital 13,084,069
Accumulated deficit (7,173,516) (5,170,959)
------------ ------------
Total shareholders' equity 5,999,511 5,246,284
------------ ------------
Total liabilities and
shareholders' equity $ 13,132,510 $ 9,336,226
============ ============
See notes to consolidated financial statements.
ALTERNATE MARKETING NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2002 and 2001
2002 2001
----------- -----------
Net revenues $20,296,838 $16,626,151
Cost of revenues 14,986,673 12,837,911
----------- -----------
Gross profit 5,310,165 3,788,240
Selling, general and
administrative expenses 5,672,350 4,536,618
----------- -----------
Loss from operations (362,185) (748,378)
Interest and other income (expense) (94,425) 125,847
----------- -----------
Loss before income taxes (456,610) (622,531)
Income tax benefit (116,722) (217,660)
----------- -----------
Loss before accounting change (339,888) (404,871)
Cumulative effect of accounting
Change - adoption of SFAS No. 142 (1,204,058) --
----------- -----------
Net loss $(1,543,946) $ (404,871)
=========== ===========
Net loss per share - basic and diluted:
Loss before accounting change $ (0.05) $ (0.09)
Cumulative effect of accounting change (0.19) --
----------- -----------
Net loss $ (0.24) $ (0.09)
=========== ===========
Weighted average number of shares
Outstanding - basic and diluted 6,380,082 4,612,805
=========== ===========
See notes to consolidated financial statements.
ALTERNATE MARKETING NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Years ended December 31, 2002 and 2001
Common Stock Additional Accumulated Shareholders'
Shares Amount Paid in Capital Deficit Equity
--------- ----------- ------------------ --------------- -------------
Balances,
January 1, 2001 4,689,105 $10,531,308 $(2,473,036) $8,058,272
Repurchase of
Common Stock (103,100) (114,065) (114,065)
Dividends Declared (2,293,052) (2,293,052)
Net loss (404,871) (404,871)
--------- ----------- ------------ ------------ ----------
Balances,
December 31, 2001 4,586,005 10,417,243 (5,170,959) 5,246,284
Common Stock
Issued:
Acquisition 3,982,323 2,572,581 2,572,581
Contingent
Consideration 183,800 85,053 85,053
Compensation 50,000 23,150 23,150
Accounts Payable 93,750 75,000 75,000
Change to $.01
par value (13,084,069) $13,084,069 --
Dividends Paid (458,611) (458,611)
Net loss (1,543,946) (1,543,946)
--------- ----------- ----------- ----------- ----------
Balances,
December 31, 2002 8,895,878 $ 88,958 $13,084,069 $(7,173,516) $5,999,511
========= =========== =========== =========== ==========
See notes to consolidated financial statements.
ALTERNATE MARKETING NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002 and 2001
2002 2001
------------ ------------
Operating activities:
Net loss $ (1,543,946) $ (404,871)
Noncash items in net loss:
Cumulative effect of accounting change 1,204,058 --
Depreciation 95,602 50,235
Amortization 43,003 181,294
Stock-based compensation expense 23,150 --
Gain on sale of assets (292) --
Changes in operating assets and liabilities,
net of acquisition:
Accounts receivable (126,618) 700,062
Prepaid and other current assets (100,952) (101,350)
Accounts payable 1,194,990 338,260
Accrued liabilities (544,467) (23,473)
------------ ------------
Net cash provided by operating
activities 244,528 740,157
------------ ------------
Investing activities:
Purchases of property and equipment (68,388) (13,689)
Net cash paid for business acquisition (186,482) --
Purchases of software -- (25,500)
------------ ------------
Net cash used in investing
Activities (254,870) (39,189)
------------ ------------
Financing activities:
Repurchase of common stock -- (114,065)
Payment of dividends (2,751,663) --
Payments on note payable, bank (435,000) --
Proceeds from issuance of note payable, bank 1,560,000 --
Principal payments on other notes payable (1,595,954) --
------------ ------------
Net cash used in financing
Activities (3,222,617) (114,065)
------------ ------------
Net increase (decrease) in cash and cash
Equivalents (3,232,959) 586,903
Cash and cash equivalents, beginning of year 3,783,082 3,196,179
------------ ------------
Cash and cash equivalents, end of year $ 550,123 $ 3,783,082
============ ============
Supplemental Cash Flows Information (See Note 15)
See notes to consolidating financial statements.
ALTERNATE MARKETING NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements include the accounts of Alternate
Marketing Networks, Inc. and its wholly-owned subsidiaries Alternate Postal
Direct, Inc., and National Home Delivery, Inc. Also included are the
accounts of the Company's majority owned subsidiary Hencie, Inc. since the
date of acquisition of August 1, 2002 (collectively referred to as the
Company). Significant intercompany transactions and balances have been
eliminated.
Business
The Company provides business services to Fortune 500 and middle market
companies through three complementary lines of business: software
implementation and other technology support services; logistics process
management; and advertising and marketing process management. These services
are provided throughout the United States to clients such as General Motors,
Verizon, Raytheon, and Lone Star Steel.
The technology segment provides software consulting, implementation, and
support services related to Oracle's suite of enterprise business
applications to help customers improve business performance through mission-
critical business solutions. The logistics segment delivers, tracks and
verifies the delivery of various products, including telephone directories,
and provides brokered transportation of various goods for national and
regional companies. The advertising and marketing segment forms newspaper
advertising networks and sells and places print advertising and advertising
inserts in suburban newspapers for national advertisers.
Revenue Recognition
Revenues for delivery services are recognized at the time of delivery.
Revenues for advertising in newspapers are recognized when the ads run in the
newspapers. Revenues for transportation logistics are recognized at the time
that the load is shipped.
Revenues for technology consulting services in 2002 are recognized on a
time and materials basis as the services are performed. The percentage-of-
completion method is used to account for fixed price contracts, with revenues
recognized as services are performed over the life of the contract, based on
the costs incurred in relation to the total estimated costs. Revenues from
separately priced maintenance contracts are initially deferred and recognized
ratably over the term of the contract, which is typically 12 months.
Revenues are accrued for all services performed that have not been billed at
the reporting date. As of December 31, 2002, accrued and unbilled revenues
were $210,773 and are included in accounts receivable, trade.
Cash Equivalents
The Company considers all highly liquid instruments with an original
maturity of three months or less to be cash equivalents.
Accounts Receivable
Accounts receivable are stated net of an allowance for doubtful accounts
of $150,000 and $100,000 at December 31, 2002 and 2001, respectively. The
Company performs credit evaluations of its customers and establishes credit
limits, periodically reviews accounts receivable for collectibility, and
provides an allowance for doubtful accounts as deemed necessary. Accounts
receivable that are factored to a lender with full recourse to the Hencie
subsidiary are $269,508 at December 31, 2002. These transfers of receivables
to the lender are accounted for as secured borrowings.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation and amortization are computed over the following estimated
useful lives of the assets using the straight-line method: computer equipment
3 to 5 years and furniture and fixtures 5 to 7 years.
Purchased computer software is stated at cost. External direct costs of
materials and services incurred in developing or obtaining internal-use
software are capitalized. The costs of purchased software and the
capitalized costs of developed internal use software are amortized over the
estimated useful lives of the assets. At December 31, 2002 and 2001,
accumulated amortization was $91,217 and $48,214 respectively.
Stock-based compensation
The Company applies the intrinsic value method under APB Opinion No. 25
to account for stock-based compensation. Statement of Financial Accounting
Standards ("SFAS") No. 123 encourages (but does not require) the cost of
stock-based compensation arrangements with employees to be measured based on
the fair value of the equity instrument awarded. As permitted by SFAS No.
123, the Company applies APB Opinion No. 25 to its stock-based compensation
awards to employees and discloses in Note 10 the required pro forma effect on
operations.
Income taxes and Certain Prior Losses
The Company uses the asset and liability method to account for income
taxes. Deferred income tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the carrying
amounts of existing assets and liabilities for accounting purposes, and their
respective tax bases. A valuation allowance is provided for those deferred
income tax assets whose recoverability is not sufficiently likely.
From inception through October 1, 1993 the Company was an S Corporation,
whereby income or loss was included in the federal income tax returns of the
shareholders. On October 1, 1993 the Company formed a wholly-owned
subsidiary, which caused a change in the Company's tax status from an S
Corporation to a C Corporation. Accumulated losses at September 30, 1993 of
$1,291,039 are included as a reduction of paid in capital.
Advertising
The cost of advertising and marketing programs are charged to operations
when incurred. Advertising expense was $109,841 and $111,393 in 2002 and
2001, respectively.
Financial Instruments
At December 31, 2002 and 2001, the Company had cash and cash
equivalents, accounts receivable, accounts payable, notes payable and long-
term debt classified as financial instruments. The market value of these
financial instruments, based upon information obtained from banking sources
and management estimates, approximated the carrying values reported in the
balance sheets.
Earnings Per Share
Basic earnings per share is determined by dividing the net income (loss)
by the weighted average number of shares of common stock outstanding.
Diluted income (loss) per share is determined by dividing the net income by
the weighted average number of shares of common stock outstanding while
giving effect to all potential dilutive common stock equivalents. In loss
years, diluted earnings per share is determined by dividing the net loss by
the weighted average number of shares of common stock outstanding without
giving effect to all common stock equivalents, as the effect would be anti-
dilutive. The anti-dilutive effects of common stock options that were
excluded from the diluted net loss per share at December 31 were as follows:
190,100 in 2002 and 266,300 in 2001.
Recent Accounting Pronouncements
In June 2002 the Financial Accounting Standards Board ("FASB") approved
for issuance SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities." SFAS No. 146 requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. This statement
is effective for fiscal years beginning after December 31, 2002. The Company
does not expect the adoption of SFAS No. 146 to have a material effect on the
Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation-Transition and Disclosure." SFAS No. 148 amends SFAS No.
123, to provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements
of SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
transition guidance and annual disclosure provisions of SFAS No. 148 are
effective for fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15, 2002.
As the Company did not make a voluntary change to the fair value based method
of accounting for stock-based employee compensation in 2002, the adoption of
SFAS No. 148 did not have a material impact on the Company's financial
position and results of operations.
Estimates
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 flow
are used in the periodic analyses of the recoverability of accounts
receivable, goodwill, deferred tax assets, and property, plant and equipment.
Historical experience and trends are used to estimate reserves, including
allowances 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.
Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year presentation.
2. Acquisitions:
On May 31, 2002, the Company entered into an Amended and Restated
Agreement and Plan of Reorganization pursuant to which it acquired
approximately 82% of the common stock of Hencie, Inc., a Delaware corporation
("Hencie"). Hencie is an information technology company offering Oracle
software consulting, implementation, and support services for a broad range
of clients and industry segments. The acquisition was ratified at the annual
shareholder meeting held July 23, 2002 and was effective August 1, 2002. In
exchange for approximately 82% of Hencie's common shares, the Company issued
3,982,323 common shares utilizing an exchange ratio of 1 share of its common
stock for 3.563 shares of Hencie common stock. The business of Hencie added
a third operating segment to the Company's services. Costs directly related
to this acquisition of $212,283 are included in the total acquisition price.
The estimated fair value of the common shares issued by the Company in
connection with this acquisition was approximately $2.5 million ($.646 per
share), and Hencie's net liabilities assumed by the Company were
approximately $4.3 million, which resulted in goodwill and other intangible
assets of approximately $7 million. Under SFAS No. 142, any goodwill and
other indefinite lived assets are not subject to amortization but will be
tested for impairment at least annually.
Net liabilities assumed consisted of the following:
Current assets $ 792,330
Other assets 136,335
Current liabilities ( 4,602,240)
Long-term debt ( 629,300)
-----------
($ 4,302,875)
===========
At the closing of the Hencie acquisition, the Company paid approximately
$609,000 to the Internal Revenue Service to satisfy an amount owed to the IRS
by Hencie, which was included in the net liabilities assumed. The Company
also made payments to Edge Technology Group, Inc., a Delaware corporation, to
satisfy amounts owed by Hencie to Edge pursuant to a settlement agreement,
dated May 22, 2002, by and between Hencie and Edge, which was included in the
net liabilities assumed. The note was subsequently sold by Edge to
Drawbridge Investment Partners, LLC ("Drawbridge Note"). The settlement
agreement included an original obligation in the aggregate amount of
$1,650,000 and required monthly payments of $60,000 in principal with
interest at 8%. After the closing of the Hencie acquisition, the Company was
notified by Edge of a potential event of default under the settlement
agreement. The Company negotiated a Waiver and Forbearance Agreement, dated
August 19, 2002, with Edge to provide for a waiver of the potential event of
default and in order to obtain a credit against the amount outstanding under
the settlement agreement. On September 6, 2002, after certain additional
payments were made and certain conditions were satisfied, a credit of
$450,000, plus a related interest credit of $10,455, were applied to reduce
the amount outstanding under the settlement agreement. Included in the net
liabilities assumed as of August 1, 2002, was the net obligation of
$1,145,000 reduced for the credit negotiated in September 2002. As of
December 31, 2002, the outstanding principal balance under the settlement
agreement was $991,734, with related accrued interest of $11,956.
On February 18, 2003, the Company entered into an agreement for
settlement of the Drawbridge Note. The agreement provided for a cash payment
of $120,000, issuance of 2,474,309 shares of the Company's Common Stock,
registration rights for such shares, and an obligation for the Company to
repurchase $100,000 of the Company's common stock from Drawbridge annually
for three years beginning February 18, 2004. These subsequent transactions
will be accounted for in 2003, as discussed in Note 16.
Also, as discussed in Note 13, the Company is contingently liable
pursuant to a legal proceeding against Hencie that related to matters that
occurred prior to the Company's acquisition of Hencie.
The unaudited pro forma combined historical results, as if Hencie had
been acquired and the related common shares had been issued at the beginning
of 2001, are provided as follows:
Years ended
December 31,
2002 2001
------------- -------------
(unaudited)
Revenues $25,675,358 $28,563,613
Loss from continuing operations ** (1,218,550) (498,822)
Net loss ** $(1,218,550) $ (498,822)
Basic and diluted loss per share $ (0.14) $ (0.06)
**The 2002 period excludes a charge for the cumulative effect of accounting
change of $1,204,058 and one-time expenses of $563,150 associated with the
Hencie acquisition. The 2001 period includes a pro forma adjustment of
$150,000 for the elimination of goodwill amortization per SFAS No. 142.
The pro forma results are not necessarily indicative of what actually
would have occurred if the acquisition had been completed as of the beginning
of each of the fiscal periods presented, nor are they necessarily indicative
of future consolidated results.
3. Property and Equipment:
Property and equipment consist of the following at December 31, 2002 and
2001:
2002 2001
Computer equipment $ 810,047 $ 272,637
Furniture and fixtures 359,984 150,292
Computer software 115,205 115,205
---------- ----------
1,285,236 538,134
Accumulated depreciation
and amortization (1,074,509) (393,817)
---------- ----------
$ 210,727 $ 144,317
========== ==========
4. Goodwill:
Historically, intangible assets consisted of the excess cost over fair
market value of net assets of acquired businesses and had been amortized
ratably over 20 years. The realizability of goodwill was evaluated
periodically when events or circumstances indicated a possible inability to
recover the carrying amount. Triggering events may include a significant
change in the industry affecting the current business model or losses related
to the specific business unit. Prior to 2002, evaluation was based upon
undiscounted cash flow projections over the remaining life of the asset. An
excess of carrying value over projected undiscounted cash flows would result
in recognition of an impairment loss. The amount of the loss would be based
on the difference between carrying value and fair value of the asset, as
measured by market comparables or discounted cash flows in the absence of
comparable market data. The interest rate used in determining discounted
cash flows was the rate that approximates the anticipated rate of return on a
like asset with similar risks to the impaired asset.
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 testing during
the second quarter ended June 30, 2002. As a result, a charge of $1,204,058
was recorded for the goodwill assigned to the logistics reporting unit. The
remaining goodwill of $800,889 at June 30, 2002 was assigned to the
advertising and marketing reporting unit. The fair market 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 Company has concluded that no
impairment has occurred for the advertising and marketing reporting unit as
of December 31, 2002.
The goodwill of approximately $7 million that arose from the acquisition
of Hencie in 2002 will be tested for impairment at least annually beginning
in 2003. The Company believes that the estimated fair value of the Hencie
reporting unit has not decreased significantly since the acquisition;
therefore, no adjustment should be made to goodwill as of December 31, 2002.
The impairment charge was recorded as a cumulative effect of an
accounting change of $1,204,058 or $0.19 per share as of January 1, 2002 in
the year ended December 31, 2002, in the accompanying consolidated statements
of operations.
The elimination of goodwill and indefinite-lived intangible amortization
has been made prospectively upon adoption of SFAS No. 142 as of January 1,
2002. Results of operations, exclusive of comparable amortization expense
that is eliminated under SFAS No. 142, is as follows:
2002 2001
--------------------- --------------------
Amount Per Share Amount Per Share
Net loss as reported $(1,543,946) $(0.24) $(404,871) ($0.09)
Add back amortization expense -- -- 149,566 $0.03
Pro forma net loss $(1,543,946) $(0.24) $(255,305) ($0.06)
5. Retirement Plan:
On September 1, 1996, the Company established a qualified 401(k)
retirement plan covering all employees who have met certain requirements as
to age and date of service. The plan allows employees to make contributions
by salary reductions. Company contributions are discretionary and are
determined annually by the Board of Directors. Company contributions in 2002
and 2001 were $9,329 and $6,237, respectively.
6. Financing and Debt:
The Company has agreements with a bank providing for a $1,000,000 line
of credit (the "Advertising and Marketing Accounts Receivable Credit
Facility") to National Home Delivery, Inc., an Illinois corporation and a
wholly owned subsidiary of the Company, and a $500,000 line of credit (the
"Logistics Accounts Receivable Credit Facility") to Alternate Postal Direct,
Inc., a Michigan corporation and a wholly owned subsidiary of the Company
("APD"). Available borrowings are based on sixty-five percent (65%) of
accounts receivable not more than ninety (90) days old and subject to certain
other conditions and restrictions, including, without limitation, restrictive
financial covenants related to the working capital and tangible net worth of
the Company. The line of credit agreements are collateralized by
substantially all of the assets of the Company. Borrowings of $1,125,000 as
of December 31, 2002, under the line of credit agreements accrue interest at
the bank's prime rate (4.25% as of December 31, 2002). As of December 31,
2002, credit in the amount of $200,000 and $175,000 was available under the
Advertising and Marketing Accounts Receivable Credit Facility and Logistics
Accounts Receivable Credit Facility, respectively. The line of credit
agreements expire on May 1, 2003. As a result of the Hencie acquisition, the
Company is currently not in compliance with all of the debt covenants under
the line of credit agreements. The bank has informed the Company that it
does not intend to demand payment prior to May 1, 2003, but it does not
intend to renew the line of credit agreements at that time. On March 25,
2003, the Company received an offer letter for an expanded factoring line of
credit, subject to certain conditions, including, without limitation, the
negotiation and execution of final legal documents, through March 2004 from
the lender of the existing "Technology Accounts Receivable Credit Facility",
as an alternative financing source, if needed.
Hencie has a financing agreement with a lender providing for the sale of
its accounts receivable to the lender (the "Technology Accounts Receivable
Credit Facility") up to $750,000. The eligibility for sale of accounts
receivable is subject to certain conditions and restrictions, including,
without limitation, concentration restrictions and verification approvals of
the accounts receivable by the lender. The sales of accounts receivables
under the Technology Accounts Receivable Credit Facility are collateralized
by substantially all of the assets of Hencie. As of December 31, 2002,
accounts receivable that are sold and remain unpaid under the Technology
Accounts Receivable Credit Facility totals $269,508 and accrues interest at
2% plus the prime rate as published in the Wall Street Journal, and the
available credit amount was $58,624.
Long-term debt assumed from the acquisition of Hencie, Inc. on August 1, 2002
consists of the following at December 31, 2002:
Small Business Administration (SBA) guaranteed
loan, interest at 9.75%, principal and
interest due in monthly installments of
$2,604 through March 2006 $ 92,508
Note payable, interest at 8%,
principal and interest due in monthly
installments of $25,000 plus interest
through March 2003 97,250
Note payable, interest at 8.89%,
principal and interest due in quarterly
Installments of $14,161 through April 2002 68,116
Drawbridge note payable, interest at 8%,
principal and interest due in monthly
installments of $60,000 through April 2004 991,734
----------
Total 1,249,608
Less current portion 308,615
----------
Long-term portion $ 940,993
==========
As of December 31, 2002, Hencie was delinquent in its payments on the
Drawbridge note payable and another note payable. As discussed in Note 2,
the Drawbridge note and the related accrued interest were settled in February
2003, for $120,000 cash, 2,474,309 common shares and other consideration.
7. Accounts payable, other:
Accounts payable, other consists of liabilities assumed with acquisition
of Hencie, Inc. which are accounts payable to former vendors, as well as
expenses related to the acquisition itself. Discounts and deferred payment
terms have been negotiated and, in some cases, are being negotiated with
certain of these creditors.
As of December 31, 2002, the Company has estimated the anticipated
amounts to be paid on the accounts payable, other. These liabilities were
assumed as part of the acquisition of Hencie, Inc. on August 1, 2002. In
reviewing the fair value of the assets and liabilities acquired, any
adjustment to the stated book value on the accounts of Hencie, Inc. prior to
the acquisition had the offsetting effect on the recorded amount of goodwill.
The Company does not anticipate any material difference between the
settlement amounts and the recorded fair values of these liabilities.
8. Accrued liabilities:
Accrued liabilities consist of the following at December 31, 2002 and 2001:
2002 2001
---------- ----------
Payroll taxes $ 12,066 $ 3,469
Salaries and other incentive compensation 351,776 76,821
Vacation 250,141 80,057
Interest 15,598 --
Insurance 132,623 14,685
Deferred revenue 30,345 15,625
Deferred rent 100,863 --
Other 99,013 9,620
---------- ----------
Total $ 992,425 $ 200,277
========== ==========
9. Income Taxes:
Deferred income taxes are recognized for the temporary differences
between the tax bases of assets and liabilities and their financial reporting
amounts. The income tax provision is the tax payable/recoverable for the
period and the change during the period in deferred tax assets and
liabilities. Based upon management's evaluation of available evidence
relating to the realization of deferred tax assets, the Company has fully
reserved deferred tax assets at December 31, 2002 and 2001.
Income tax expense (benefit) for the years ended December 31, 2002 and
2001 consists of the following:
Year Ended
December 31,
2002 2001
--------- ---------
Federal:
Current benefit from net
operating loss (NOL)
carryback to prior years $(128,282) $(220,032)
State:
Current 11,560 2,372
--------- ---------
$(116,722) $(217,660)
========= =========
The difference between income tax benefit at the U.S. statutory rate and
the Company's actual income tax benefit is as follows:
Year Ended
December 31,
2002 2001
--------- ---------
Income tax benefit at the U.S.
statutory rate $(564,387) $(211,660)
Change in valuation allowance 427,098 --
Nondeductible goodwill -- 31,485
Other 20,567 (37,485)
--------- --------
Income tax benefit $(116,722) $(217,660)
========= =========
Major components of the Company's deferred taxes are as follows:
December 31,
2002 2001
---------- ----------
Receivable allowance $ 51,000 $ 34,000
Property and equipment 31,961 14,000
Accrued vacation 85,048 27,000
Accrued insurance and compensation 121,841 --
Deferred rent 34,293 --
Other 91,417 --
NOL carryforwards 2,694,306 825,000
Valuation allowance (3,109,866) (900,000)
---------- ----------
$ - $ -
========== ==========
At December 31, 2002, the Company has NOL carryforwards of approximately
$7,700,000, which are available to reduce future taxable income. These
carryforwards expire in 2011 to 2013. The annual utilization of NOL
carryforwards may be limited by certain historical ownership changes of the
Company. These NOL carryforwards include approximately $5,100,000 related to
Hencie at the date of acquisition, with a corresponding amount included in
the valuation allowance, the tax benefit of which, if and when recognized,
will be first credited to the applicable goodwill arising from the
acquisition and then to the income tax provision.
10. Common Stock, Options and Warrants:
On August 1, 2002, the Company reincorporated in Delaware and exchanged
its common stock, no par value, for common stock, $.01 par value. The
Amended and Restated Certificate of Incorporation of the Company provides for
fifty million (50,000,000) authorized shares of commons stock, par value
$.01, and five million (5,000,000) shares of preferred stock, par value $.01.
In 1998, the Company began acquiring shares of its common stock from
time to time in the open market or in privately negotiated transactions. The
Company purchased and retired 103,100 shares of common stock in 2001 at an
aggregate cost of $114,065. The Company is currently authorized to purchase
up to 300,000 shares of which 103,100 had been repurchased through December
31, 2002.
The Company has adopted a stock-based incentive plan, the 1995 Long-Term
Incentive Stock Option Plan (the "Incentive Plan") to encourage stock
ownership by employees, officers, directors and certain other agents. The
Board of Directors or a committee appointed by the Board of Directors
administers the Incentive Plan. Options granted may be either incentive
stock options as defined by the Internal Revenue Code, or nonqualified stock
options. Options granted have a vesting period of 6 months to 5 years with
terms ranging from 5 to 10 years. In connection with this plan, the Company
has reserved a total of 1,500,000 shares of common stock. As of December 31,
2002, options for 122,600 shares were outstanding, 7,500 options have been
exercised, and 1,369,900 remain available for future grants. The Company
also had options for 47,500 shares outstanding pursuant to the Outside
Directors and Advisors Stock Option Plan, which was terminated July 2, 2002.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. All options granted to date were
granted with exercise prices not less than the fair market value of the
Company's common stock on the date of grant. Therefore, no compensation
expense for stock options has been recognized in any year. If compensation
cost for the Company's stock based plans had been determined based on the
fair value of the options at the grant dates, consistent with the method
prescribed by the SFAS No. 123, "Accounting for Stock Based Compensation",
the Company's net income and income per share would have been adjusted to the
pro forma amounts indicated in the following table:
Year Ended
December 31,
2002 2001
---------- ----------
Net Loss
As Reported $(1,543,946) $ (404,871)
Pro Forma $(1,547,211) $ (415,990)
Loss Per Share - basic and diluted
As Reported ($0.24) ($0.09)
Pro Forma ($0.24) ($0.09)
The fair value of each option was estimated to be $0.39 for 2001 on the
date of grant using the Black-Scholes option pricing model with the following
assumptions for 2001; risk free rate of five percent; no dividend yield; and
expected life 5 years. The volatility assumption was 28 percent. No options
were granted in 2002.
A summary of the status of the Company's options granted to employees as
of December 31, 2002 and 2001 and the changes during the year ended on those
dates is presented below:
December 31, 2002 December 31, 2001
Options Weighted- Options Weighted-
Avg. Avg.
Exercise Exercise
Price Price
--------- --------- --------- ---------
Outstanding-beginning
of year 191,300 $2.75 182,500 $2.83
Granted at the money -- -- 10,000 $1.13
Exercised -- -- -- --
Forfeited -- -- -- --
Expired (21,200) $2.02 (1,200) $1.39
--------- ---------
Outstanding-end of year 170,100 $2.84 191,300 $2.75
========= =========
Exercisable at end of
year 168,433 $2.85 186,300 $2.77
Options outstanding as of December 31, 2002 are described below:
Outstanding Exercisable
----------------------------------- ---------------------
Weighted Avg Weighted Avg Weighted Avg
Exercise Remaining Exercise
Range of Prices Options Price Term Options Price
--------------- ------- ------------ ------------ ------- ------------
$1.04 to $1.39 32,000 $1.12 6 years 32,000 $1.12
$2.05 to $3.75 118,100 $2.99 5 years 116,433 $3.00
$4.00 to $5.19 20,000 $4.72 5 years 20,000 $4.72
-------------- ------- ----- --------- ------- -----
$1.04 to $5.19 170,100 $2.84 5 years 168,433 $2.85
======= =======
A summary of the status of the Company's warrants granted to non-
employees as of December 31, 2002 and 2001 and the changes during the year
ended on those dates is presented below:
December 31, 2002 December 31, 2001
Options Weighted- Options Weighted-
Avg. Avg.
Exercise Exercise
Price Price
--------- --------- --------- ---------
Outstanding-beginning
of year 55,000 $3.00 55,000 $3.00
Granted at a premium -- -- -- --
Expired (55,000) $3.00 -- --
-------- --------
Outstanding-end of year -- -- 55,000 $3.00
======== ========
Exercisable-end of year -- -- 55,000 $3.00
At December 31, 2002 and 2001, the Company has outstanding stock options
aggregating 20,000 shares of Common Stock exercisable at $2.045 per share,
issued in conjunction with the acquisition of AdTrackMedia in 2000. These
options expire May 27, 2003.
11. Interest and Other Income (Expense):
Interest and other income (expense) consists of the following:
2002 2001
---------- ----------
Interest income $ 15,352 $ 125,847
Interest expense (110,069) --
Gain on asset sale 292 --
---------- ----------
$ (94,425) $ 125,847
========== ==========
12. Dividend Payable:
On December 12, 2001, the Company declared a special cash dividend of 50
cents per share payable on January 22, 2002, to shareholders of record on
January 15, 2002.
13. Commitments and Contingencies:
Operating Leases:
The Company leases certain office facilities, warehouse facilities, and
equipment used in its operations. Future minimum rental payments required
under operating leases that have initial or remaining terms in excess of one
year at December 31, 2002 are as follows:
Year
2003 $ 477,260
2004 457,224
2005 142,036
2006 5,738
---------
$1,082,258
=========
Rental expense for facilities, transportation vehicles and equipment in
2002 and 2001 was $473,517 and $393,657, respectively.
Legal Proceedings:
On October 30, 2002, Hencie.com, Inc., a Delaware corporation, and Paul
A. Tanner initiated a legal proceeding in the County Court of Dallas County,
Texas against Hencie Consulting, a wholly-owned subsidiary of Hencie, Inc.,
certain current and former employees of Hencie Consulting, and certain other
parties ("Tanner Litigation"). Hencie.com and Mr. Tanner are seeking
approximately $2.0 million, exemplary damages, interest, and legal fees in
connection with claims regarding an alleged equity investment in Hencie
Consulting prior to acquisition of Hencie by the Company. On February 18,
2003, the Company executed a Mutual Release Agreement with the Company's CEO
which provides for the Company's CEO to contribute a number of shares of
common stock to the Company if the Company requests the transfer to be used
for any settlement of this litigation. The Company intends to vigorously
defend against and contest the claims and pursue any potential counterclaims
that may be available to Hencie Consulting. The Company believes that the
shares provided for in the Mutual Release Agreement would be sufficient to
cover the Company's portion, if any, of a settlement amount. Therefore, the
Company believes that the resolution of this matter will not have a material
adverse effect on its financial position, results of operations or cash
flows. However, no assurance can be given that the Company would not be
materially adversely affected by an adverse outcome with respect to these
claims or legal fees or expenses related to investigating, contesting, and
defending against these claims (whether or not the Company is successful in
defending against these claims), and the diversion of the time and resources
of Company management in connection with these claims. Because this
contingency arose prior to the Company's acquisition of Hencie Consulting,
any loss from the resolution of this matter would be accounted for as
additional goodwill, subject to impairment testing.
On August 22, 2002, a former officer of Hencie initiated a legal
proceeding in the District Court of Dallas County, Texas against Hencie
seeking approximately $380,000 in damages in connection with claims regarding
an alleged breach of the employment agreement between Hencie and the former
officer. The former officer was terminated by Hencie for cause prior to the
acquisition of Hencie by the Company. The Company intends to vigorously
defend against and contest the claims and pursue any potential counterclaims
that may be available to Hencie on behalf of Hencie. The Company believes
that it is unlikely that this matter will have a material adverse effect on
its financial position, results of operations or cash flows.
On July 3, 2002, the Company initiated a legal proceeding in the Superior
Court of Essex County, Massachusetts against a customer of Alternate Postal
Direct seeking damages, interest, and legal fees in connection with claims
regarding a breach of contract by the customer and non-payment of an
outstanding account receivable. On August 12, 2002, the customer filed an
answering statement and counterclaims seeking judgment and unspecified
damages. The Company intends to vigorously pursue its claims against the
customer and defend against and contest the counterclaims.
14. Segment Information and Significant Customers:
The method which the Company utilizes to evaluate profitability, and
allocate assets and resources, is divided into three operating segments by
product areas: (i) advertising and marketing includes newspaper advertising;
(ii) logistics includes the delivery of telephone directories, as well as,
tracking, verification and transportation services; and (iii) technology
includes enterprise application consulting services. Management evaluates
segment profitability by reviewing gross profits. Substantially all of the
Company's revenues are generated in the United States.
In 2002 the advertising and marketing segment had 3 customers that
accounted for a total of approximately 58% of the segment revenues. In 2002,
the logistics segment had 2 customers that accounted for a total of
approximately 99% of the segment revenues. In 2002, the technology segment
has 3 customers that accounted for a total of approximately 88% of the
segment revenues.
Segment analysis is provided in the tables below.
2002 2001
------ ------
Revenues:
Technology $ 3,073,881 $ --
Advertising and marketing 13,322,883 10,893,681
Logistics marketing 3,900,074 5,732,470
----------- -----------
Total revenues $20,296,838 $16,626,151
=========== ===========
Gross Profits:
Technology $ 1,380,497 $ --
Advertising and marketing 2,123,280 1,757,166
Logistics marketing 1,806,388 2,031,074
----------- -----------
Total gross profit 5,310,165 3,788,240
Selling, general & administrative expenses 5,672,350 4,536,618
Interest and other income (expense) (94,425) 125,847
----------- -----------
Loss before income taxes and
accounting change $ (456,610) $ (622,531)
=========== ===========
Gross Profit Percentages:
Technology 44.9% --
Advertising and marketing 15.9% 16.1%
Logistics marketing 46.3% 35.4%
----------- -----------
Total Gross Profit 26.2% 22.8%
=========== ===========
Accounts receivable and revenues from significant customers represent
the following percentages of the Company's net accounts receivable and total
revenues:
Accounts Receivable at Revenues for the Years Ended
December 31, December 31,
2002 2001 2002 2001
Customer A 22% 18% 17% 21%
Customer B 19 10 17 18
Customer C 11 8 14 11
Customer D 6 -- 10 --
Customer E 4 8 7 9
Customer F 1 4 3 10
15. Supplemental Cash Flows Information:
The following is provided as supplemental information to the
consolidated statements of cash flows:
2002 2001
------------ ------------
Income taxes paid $ -- $ 3,190
============ ============
Interest paid $ 132,295 $ --
============ ============
Noncash investing and financing activities are summarized below:
On August 1, 2002, the Company issued 3,982,323 shares of its
restricted, unregistered common stock valued at $2,572,581 for approximately
82% of the shares of Hencie, Inc. (Note 2). The Company paid closing costs
totaling $212,283, assumed net liabilities of $4,302,875 and recorded
goodwill of $7,087,739.
On August 1, 2002, the Company issued 183,800 shares of its restricted,
unregistered common stock valued at $85,053 to GoldenGoose Software, Inc.
("GGSI") as contingent consideration in exchange for certain assets of GGSI
pursuant to an asset purchase agreement dated May 3, 2000 by and between the
Company and GGSI. This amount was recorded as additional goodwill.
On August 1, 2002, the Company issued 50,000 shares of its restricted,
unregistered common stock valued at $23,150 to an officer of the Company
pursuant to the officer's employment agreement. The amount was recorded as
compensation expense.
On September 19, 2002, the Company issued 93,750 shares of its
restricted, unregistered common stock to outside legal counsel to the Company
for a reduction of $75,000 of the outstanding balance of trade accounts
payable to the outside legal counsel for legal services rendered to the
Company.
16. Subsequent Events:
Effective as of January 1, 2003, the Company's CEO contributed 1,474,309
common shares outstanding to the Company. On February 18, 2003 the Company
granted options to the CEO to purchase 1,700,000 common shares at $0.50 per
share. On February 18, 2003, the Company entered into the Release Agreement
by and among the Company, Hencie, Inc., Hencie Consulting Services, Inc.,
K2VC LTD, Adil Khan, Drawbridge Investment Partners, LLC., and certain
directors and stockholders of the Company. The agreement provided for
settlement of the Drawbridge note payable of Hencie for a cash payment of
$120,000, issuance of 2,474,309 shares of the Company's Common Stock,
registration rights for such shares, and a contingent obligation for the
Company to repurchase $100,000 of the Company's common stock from Drawbridge
annually for three years beginning February 18, 2004. In the subsequent
accounting for this debt settlement in 2003, management estimates that the
total cash and fair value of the equity consideration given was approximately
equal to the amount of the note payable and accrued interest, which was
$991,734 and $11,956, respectively, at December 31, 2002.
Item 8. Changes in and Disagreement with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The information required by this Item 9 is incorporated by reference
from the definitive proxy statement on Schedule 14A of the Company to be
filed by the Company with the Commission not later than April 30, 2003.
Item 10. Executive Compensation.
The information required by this Item 10 is incorporated by reference
from the definitive proxy statement on Schedule 14A of the Company to be
filed by the Company with the Commission not later than April 30, 2003.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item 11 is incorporated by reference
from the definitive proxy statement on Schedule 14A of the Company to be
filed by the Company with the Commission not later than April 30, 2003.
Item 12. Certain Relationships and Related Transactions.
The information required by this Item 12 is incorporated by reference
from the definitive proxy statement on Schedule 14A of the Company to be
filed by the Company with the Commission not later than April 30, 2003.
Item 13. Exhibits and Reports on Form 8-K.
(a)Exhibits
Exhibit No. Description of Exhibit
2.1 Acquisition Agreement dated March 29, 1996 between the Company
and National Home Delivery, Inc. (incorporated by reference
from Form 8-K of the Company dated April 11, 1996)
2.2 Asset Purchase Agreement dated February 17, 2000, between the
Company, Kevin Powers and Total Logistics, Inc. (incorporated
by reference from Form 8-K of the Company dated March 1, 2000)
2.3 Consulting Agreement dated February 17, 2000 between the
Company, Kevin Powers and Total Logistics, Inc. (incorporated
by reference from Form 8-K of the Company dated March 1, 2000)
2.4 Amended and Restated Agreement and Plan of Reorganization dated
May 31, 2002 by and among the Company, 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.
(incorporated by reference from Appendix A to the Definitive
proxy statement of the Company dated July 23, 2002 and filed
June 16, 2002 by the Company with the Commission)
3.1 Amended and Restated Certificate of Incorporation (incorporated
by reference from Exhibit 4.1 to the Form 8-K of the Company
dated August 1, 2002 and filed August 14, 2002 by the Company
with the Commission)
3.2 Amended and Restated Bylaws (incorporated by reference from
Exhibit 4.2 to the Form 8-K of the Company dated August 1,
2002 and filed August 14, 2002 by the Company with the
Commission)
4.1 1995 Long-Term Incentive and Stock Option Plan (incorporated
by reference from the Registration Statement on Form SB-2;
Commission File No. 33-95332C)
4.2 1995 Outside Directors and Advisors Stock Option Plan
(incorporated by reference from the Registration Statement
on Form SB-2; Commission File No. 33-95332C)
4.3 Form of Registration Rights Agreement with noteholders of
the Company (incorporated by reference from the Registration
Statement on Form SB-2; Commission File No. 33-95332C)
10.1 Employment Agreement dated July 21, 1995 between the
Company and Phillip D. Miller (incorporated by reference
from the Registration Statement on Form SB-2; Commission
File No. 33-95332C)
10.2 Addendum to Employment Agreement dated July 21, 1995 between
the Company and Phillip D. Miller dated January 1, 2000
(incorporated by reference from the Form 10-KSB of the
Company for the fiscal year ended December 31, 1999 filed
March 30, 2000 by the Company with the Commission)
10.3 Second Addendum dated to Employment Agreement dated July 21,
1995 between the Company and Phillip D. Miller (incorporated
by reference from Exhibit 99.2 to the Form 8-K of the Company
dated August 1, 2002 and filed August 14, 2002 by the Company
with the Commission)
10.4 Employment Agreement dated July 1, 2001 between the Company and
Sandra J. Smith (incorporated by reference from the Form
10-KSB of the Company for the fiscal year ended December 31,
2001 filed March 28, 2002 by the Company with the Commission)
10.5 Addendum dated to Employment Agreement dated July 1, 2001
between the Company and Sandra J. Smith (incorporated by
reference from Exhibit 99.2 to the Form 8-K of the Company
dated August 1, 2002 and filed August 14, 2002 by the Company
with the Commission)
10.6 Employment Agreement dated August 1, 2002 between the Company
and Adil Khan (incorporated by reference from Exhibit 99.1 to
the Form 8-K of the Company dated August 1, 2002 and filed
August 14, 2002 by the Company with the Commission)
10.7 Loan Agreement (incorporated by reference from the Form 10-KSB
of the Company for the fiscal year ended December 31, 2001
filed March 28, 2002 by the Company with the Commission)
10.8 Times Mirror Stock Purchase Agreement (incorporated by reference
from the Form 10-QSB of the Company for the quarterly period
ended September 30, 1999)
10.9 Contribution Agreement dated January 1, 2003 between the
Company, K2VC LTD., a Texas limited partnership (incorporated
by reference from Exhibit 99.1 to the Form 8-K of the Company
dated and filed February 20, 2003 by the Company with the
Commission)
10.10 Mutual Release Agreement dated February 18, 2003 between the
Company, K2VC LTD., a Texas limited partnership (incorporated
by reference from Exhibit 99.2 to the Form 8-K of the
Company dated and filed February 20, 2003 by the Company
with the Commission)
10.11 Non-Qualified Stock Option Agreement dated February 18, 2003
between the Company and Adil Khan (incorporated by reference
from Exhibit 99.3 to the Form 8-K of the Company dated and
filed February 20, 2003 by the Company with the Commission)
10.12 Release Agreement dated February 18, 2003 between the Company,
Hencie, Inc., a Delaware corporation, and Hencie Consulting
Services, Inc. a Texas corporation, K2VC LTD., a Texas limited
partnership, Adil Khan, Drawbridge Investment Partners, LLC, a
Delaware limited liability company, and certain directors and
stockholders of the Company (incorporated by reference from
Exhibit 99.4 to the Form 8-K of the Company dated and filed
February 20, 2003 by the Company with the Commission)
21.1 List of Subsidiaries of the Company (filed herewith)
23.1 Consent of Deloitte & Touche, LLP (filed herewith)
23.2 Consent of PricewaterhouseCoopers, LLP (filed herewith)
(b)Reports on Form 8-K.
The following reports on Form 8-K were filed during the last quarter of
the period covered by this report:
Date of
Report Description of Form 8-K
11/19/02 Form 8-K of the Company dated and filed November 19, 2002 by
the Company with the Commission (regarding the Section 906
Certifications of the chief executive officer and the chief
financial officer of the Company)
Item 14. Controls and Procedures.
Within the 90-day period prior to the filing of this report, an
evaluation was carried out under the supervision and with the participation
of the Company's management, including our Chief Executive Officer ("CEO")
and Chief Financial Officer ("CFO"), of the effectiveness of our disclosure
controls and procedures. Based on that evaluation, the CEO and CFO have
concluded that the Company's disclosure controls and procedures are effective
to ensure that information required to be disclosed by the Company in reports
that it files or submits under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in SEC rules and
forms. Subsequent to the date of their evaluation, there were no significant
changes in the Company's internal controls or in other factors that could
significantly affect the disclosure controls, including any corrective
actions with regard to significant deficiencies and material weaknesses.
SIGNATURES
In accordance with Section 13 or 15(d) 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.
Dated: March 28, 2003 By:/s/Adil Khan
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Dated
/s/Adil Khan March 28, 2003
Adil Khan, Chief Executive Officer
(Principal executive officer) and Director
/s/Phillip D. Miller March 28, 2003
Phillip D. Miller, President and Chairman of the
Board of Directors
/s/Sandra J. Smith March 28, 2003
Sandra J. Smith, Chief Financial Officer and
Treasurer (Principal financial and accounting officer)
/s/Phillip Baker March 28, 2003
Phillip Baker, Director
/s/Thomas Hiatt March 28, 2003
Thomas Hiatt, Director
/s/J. Robert Routt March 28, 2003
J. Robert Routt, Director
CERTIFICATIONS
I, Adil Khan, certify that:
1. I have reviewed this annual report on Form 10-KSB of Alternate
Marketing Networks, Inc., a Delaware corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 28, 2003 By: /s/Adil Khan
Name: Adil Khan
Title: Chief Executive Officer
I, Sandra J. Smith, certify that:
1. I have reviewed this annual report on Form 10-KSB of Alternate
Marketing Networks, Inc., a Delaware corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 28, 2003 By: /s/Sandra J. Smith
Name: Sandra J. Smith
Title: Chief Financial Officer
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
2.1 Acquisition Agreement dated March 29, 1996 between the Company
and National Home Delivery, Inc. (incorporated by reference
from Form 8-K of the Company dated April 11, 1996)
2.2 Asset Purchase Agreement dated February 17, 2000, between the
Company, Kevin Powers and Total Logistics, Inc. (incorporated
by reference from Form 8-K of the Company dated March 1, 2000)
2.3 Consulting Agreement dated February 17, 2000 between the
Company, Kevin Powers and Total Logistics, Inc. (incorporated
by reference from Form 8-K of the Company dated March 1, 2000)
2.4 Amended and Restated Agreement and Plan of Reorganization dated
May 31, 2002 by and among the Company, 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.
(incorporated by reference from Appendix A to the Definitive
proxy statement of the Company dated July 23, 2002 and filed
June 16, 2002 by the Company with the Commission)
3.1 Amended and Restated Certificate of Incorporation (incorporated
by reference from Exhibit 4.1 to the Form 8-K of the Company
dated August 1, 2002 and filed August 14, 2002 by the Company
with the Commission)
3.2 Amended and Restated Bylaws (incorporated by reference from
Exhibit 4.2 to the Form 8-K of the Company dated August 1,
2002 and filed August 14, 2002 by the Company with the
Commission)
4.1 1995 Long-Term Incentive and Stock Option Plan (incorporated
by reference from the Registration Statement on Form SB-2;
Commission File No. 33-95332C)
4.2 1995 Outside Directors and Advisors Stock Option Plan
(incorporated by reference from the Registration Statement
on Form SB-2; Commission File No. 33-95332C)
4.3 Form of Registration Rights Agreement with noteholders of
the Company (incorporated by reference from the Registration
Statement on Form SB-2; Commission File No. 33-95332C)
10.1 Employment Agreement dated July 21, 1995 between the
Company and Phillip D. Miller (incorporated by reference
from the Registration Statement on Form SB-2; Commission
File No. 33-95332C)
10.4 Addendum to Employment Agreement dated July 21, 1995 between
the Company and Phillip D. Miller dated January 1, 2000
(incorporated by reference from the Form 10-KSB of the
Company for the fiscal year ended December 31, 1999 filed
March 30, 2000 by the Company with the Commission)
10.5 Second Addendum dated to Employment Agreement dated July 21,
1995 between the Company and Phillip D. Miller (incorporated
by reference from Exhibit 99.2 to the Form 8-K of the Company
dated August 1, 2002 and filed August 14, 2002 by the Company
with the Commission)
10.4 Employment Agreement dated July 1, 2001 between the Company and
Sandra J. Smith (incorporated by reference from the Form
10-KSB of the Company for the fiscal year ended December 31,
2001 filed March 28, 2002 by the Company with the Commission)
10.5 Addendum dated to Employment Agreement dated July 1, 2001
between the Company and Sandra J. Smith (incorporated by
reference from Exhibit 99.2 to the Form 8-K of the Company
dated August 1, 2002 and filed August 14, 2002 by the Company
with the Commission)
10.6 Employment Agreement dated August 1, 2002 between the Company
and Adil Khan (incorporated by reference from Exhibit 99.1 to
the Form 8-K of the Company dated August 1, 2002 and filed
August 14, 2002 by the Company with the Commission)
10.7 Loan Agreement (incorporated by reference from the Form 10-KSB
of the Company for the fiscal year ended December 31, 2001
filed March 28, 2002 by the Company with the Commission)
10.8 Times Mirror Stock Purchase Agreement (incorporated by reference
from the Form 10-QSB of the Company for the quarterly period
ended September 30, 1999)
10.9 Contribution Agreement dated January 1, 2003 between the
Company, K2VC LTD., a Texas limited partnership (incorporated
by reference from Exhibit 99.1 to the Form 8-K of the Company
dated and filed February 20, 2003 by the Company with the
Commission)
10.10 Mutual Release Agreement dated February 18, 2003 between the
Company, K2VC LTD., a Texas limited partnership (incorporated
by reference from Exhibit 99.2 to the Form 8-K of the
Company dated and filed February 20, 2003 by the Company
with the Commission)
10.11 Non-Qualified Stock Option Agreement dated February 18, 2003
between the Company and Adil Khan (incorporated by reference
from Exhibit 99.3 to the Form 8-K of the Company dated and
filed February 20, 2003 by the Company with the Commission)
10.12 Release Agreement dated February 18, 2003 between the Company,
Hencie, Inc., a Delaware corporation, and Hencie Consulting
Services, Inc. a Texas corporation, K2VC LTD., a Texas limited
partnership, Adil Khan, Drawbridge Investment Partners, LLC, a
Delaware limited liability company, and certain directors and
stockholders of the Company (incorporated by reference from
Exhibit 99.4 to the Form 8-K of the Company dated and filed
February 20, 2003 by the Company with the Commission)
21.1 List of Subsidiaries of the Company (filed herewith)
23.1 Consent of Deloitte & Touche, LLP (filed herewith)
23.2 Consent of PricewaterhouseCoopers, LLP (filed herewith)
EXHIBIT 21.1
Subsidiaries of Alternate Marketing Networks, Inc.
Name of Subsidiary State or other
jurisdiction of Names under which
incorporation or such subsidiary
organization does business
Alternate Postal Direct, Inc. Michigan APD
National Home Delivery, Inc. Illinois US Suburban Press,
USSPI
Hencie, Inc. Delaware
Hencie Consulting Services, Inc. Texas
EXHIBIT 23.1
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-88129 of Alternate Marketing Networks, Inc. on Form S-8 of our report
dated March 26, 2003 appearing in this Annual Report on Form 10-KSB of
Alternate Marketing Networks, Inc. for the year ended December 31, 2002.
/s/DELOITTE & TOUCHE LLP
Dallas, Texas
March 31, 2003
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File No. 333-88129) of Alternate Marketing Networks,
Inc. of our report dated March 15, 2002 relating to the financial statements,
which appear in this Form 10-KSB.
/s/PRICEWATERHOUSECOOPERS LLP
Grand Rapids, Michigan
March 26, 2003