UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM ____ TO ____ .
AAMPRO GROUP, INC.
(Exact name of registrant as specified in its charter)
NEVADA 87-0419231
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
3592 Route 22 W, Whitehouse, New Jersey 08888
(Address of Principal Executive Offices and Zip Code)
Issuer's Telephone Number: (908) 534-1446
Former name, former address and former fiscal year, if changed since last
report: No changes.
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value 0.0001 per share
Indicate by mark (X) whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days YES |X| NO |_|
Number of shares outstanding of each of the registrant's classes of common stock
as of November 15, 2003: Common Stock: 51,999,984.
AAMPRO GROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I
Item 1. Financial Statements
Consolidated Balance Sheet 4
Consolidated Statements of Operations 5
Consolidated Statements of Cash Flows 6
Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 12
Condition and Results of Operations
Item 3. Legal Proceedings 15
Item 4. Procedures and Controls 15
PART II
Item 5. Other information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Certifications 17
ITEM 1: FINANCIAL STATEMENTS
To the Stockholders and Board of Directors of
AAMPRO Group, Inc. and Subsidiaries
We have reviewed the accompanying balance sheet of AAMPRO Group, Inc. and
Subsidiaries as of September 30, 2003, and the related statements of operations
and statements of cash flows for the three and nine month periods ended
September 30, 2003 and 2002. These financial statements are the responsibility
of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
Bridgewater, New Jersey
November 17, 2003
AAMPRO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2003
Assets
Current Assets
Cash $ -
Accounts receivable 571,128
Note receivable 3,241
Prepaid consulting 15,250
---------------
Total Current Assets 589,619
Note receivable, net of current portion 239,329
Customer lists, net of accumulated amortization of $289,018 345,582
Property and equipment 63,734
Deposits 3,412
Investment in LLC 147,715
---------------
Total Assets 1,389,391
---------------
Liabilities and Stockholders' Equity (Impairment)
Current Liabilities
Accounts payable 106,539
Accrued expenses 452,035
Health benefits payable 926,648
Payroll taxes payable 272,208
Current maturities of long-term debt 27,603
Client deposits 84,345
---------------
Total Current Liabilities 1,869,378
Long-term debt, excluding current maturities 61,679
---------------
Total Liabilities 1,931,057
---------------
Stockholders' Equity (Impairment)
Common stock, $.001, 300,000,000 shares authorized, 49,741,276 49,741
issued and outstanding
Series A, 10% cumulative convertible preferred stock, $.001 par value 3
Additional paid in capital 1,032,175
Accumulated (deficit) (1,623,585)
---------------
(541,666)
Total Stockholders' Equity (Impairment)
---------------
Total Liabilities and Stockholders' Equity (Impairment) $ 1,389,391
---------------
See notes to the consolidated financial statement.
4
AAMPRO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
2003 2002 2003 2002
---------------- --------------- ---------------- ---------------
Revenue $ 4,882,939 $ 4,517,595 $ 15,408,891 $ 12,948,951
---------------- --------------- ---------------- ---------------
Cost of Services
Payroll 4,226,162 3,789,385 13,033,695 10,864,520
Payroll taxes 257,532 348,811 1,064,156 1,083,804
Employee benefits 157,817 146,547 708,649 484,614
Workers compensation insurance 53,237 50,265 119,419 144,825
---------------- --------------- ---------------- ---------------
Total Cost of Services 4,694,748 4,335,008 14,925,919 12,577,763
---------------- --------------- ---------------- ---------------
Gross Profit 188,191 182,587 482,972 371,188
---------------- --------------- ---------------- ---------------
Operating Expenses
General and administrative expenses 150,629 156,412 650,610 382,426
Stock based compensation 130,730 - 623,919 -
Depreciation 4,000 9,194 10,218 14,912
Amortization 11,606 29,676 34,818 53,430
---------------- --------------- ---------------- ---------------
Total Operating Expenses 296,965 195,282 1,319,565 450,768
---------------- --------------- ---------------- ---------------
(108,774) (12,695) (836,593) (79,580)
Loss From Operations
---------------- --------------- ---------------- ---------------
Other Income (Expense)
Interest income 373 747 648 747
Interest expense (12,593) (6,023) (29,655) (19,024)
---------------- --------------- ---------------- ---------------
Total Other (Expense) (12,220) (5,276) (29,007) (18,277)
---------------- --------------- ---------------- ---------------
(120,994) (17,971) (865,600) (97,857)
Loss Before Income Taxes
Income Taxes - 500 - 500
---------------- --------------- ---------------- ---------------
Net Loss $ (120,994) $ (18,471) $ (865,600) $ (98,357)
---------------- --------------- ---------------- ---------------
Earning (Loss) Per Share $ - $ - $ (0.02) $ -
---------------- --------------- ---------------- ---------------
Weighted Average Number of Common 47,320,232 30,792,321 42,372,038 30,792,321
Shares Outstanding (adjusted for split)
See notes to the consolidated financial statements.
5
AAMPRO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
------------------------------------------
2003 2002
-------------------- ------------------
Cash Flows From Operating Activities
Net Loss $ (865,600) $ (98,357)
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operations
Depreciation and amortization 45,036 67,757
Stock and options issued for consulting services 626,363 -
Decrease (Increase) in Assets
Accounts receivable (113,632) (23,635)
Other current assets (15,250) -
Deposits 113 (363)
Increase (Decrease) in Liabilities
Accounts payable 52,101 (181,680)
Accrued expenses 5,768 9,685
Health benefits payable 178,809 141,461
Payroll taxes payable (84,891) 200,237
Client deposits (25,548) (3,324)
-------------------- ------------------
Net Cash Used by Operating Activities (196,731) 111,781
-------------------- ------------------
Cash Flows From Investing Activities
Cash paid for equipment (41,459) -
-------------------- ------------------
Cash Flows From Financing Activities
Repayments for advances from vendor - (72,000)
Proceeds from notes receivable 5,680 -
Repayments of long-term debt (4,204) (9,875)
Proceeds from long-term debt 25,000 -
Proceeds from issuance of preferred stock and warrants 22,500 -
Proceeds from exercise of stock options 40,600 -
-------------------- ------------------
Net Cash Provided (Used) by Financing Activities 89,576 (81,875)
-------------------- ------------------
Net Decrease in Cash (148,614) 29,906
Cash at Beginning of Period 148,614 11,154
-------------------- ------------------
Cash at End of Period - 41,060
-------------------- ------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the
period for:
Interest 29,655 19,024
-------------------- ------------------
Income Taxes 120 -
-------------------- ------------------
See notes to the consolidated financial statements.
6
AAMPRO GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization
AAMPRO Group, Inc. and Subsidiaries (the "Company") was organized on October 8,
1995 under the laws of the State of New Jersey. The Company is primarily engaged
in the business of providing employee leasing, payroll, benefits and human
resource management services to small and middle market businesses in a variety
of industries.
Effective October 1, 2002, the Company entered into an agreement to acquire all
of the outstanding common stock of Trident Systems, Inc. (Trident). Pursuant to
the agreement, AAMPRO, Inc. exchanged 100% of their common shares for 10,261,607
newly issued shares of Trident.
For accounting purposes, the acquisition has been treated as a reverse
acquisition or public shell merger of Trident by AAMPRO, Inc. and as a
recapitalization of AAMPRO. The historical financial statements prior to October
1, 2002, are those of AAMPRO, Inc. Subsequent to the exchange, Trident changed
its name to AAMPRO Group, Inc. The Company's operations are entirely those of
AAMPRO Group, Inc.
Principles of Consolidation
The consolidated financial statements include the accounts of AAMPRO Group, Inc.
and its wholly owned subsidiaries, AAMPRO, Inc. and AAMPRO Pay, LLC. All
significant intercompany balances and transactions have been eliminated.
Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Item 310 of Regulation S-B. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three months ended March 31, 2003 and 2002 are not necessarily indicative of the
results that may be expected for the years ended December 31, 2003 and 2002. The
unaudited condensed financial statements should be read in conjunction with the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-KSB for the year ended December 31, 2002.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Allowance for Doubtful Accounts
An allowance for doubtful accounts has not been established, as all accounts
receivable are considered to be collectible.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets: 3-5 years for computer equipment and
software and 7 years for office furniture and equipment. Repairs and maintenance
7
expenditures which do not extend the useful lives of related assets are expensed
as incurred.
Revenue Recognition
Revenue is recognized as services are provided. Billing to the Company's clients
is based on the average annual cost for services spread in equal payments over
the clients' annual billing cycle. Billings do not reflect actual expenses
incurred due to the front loading and subsequent phase-out of expenses and
taxes. As a direct result of this averaging, net income is decreased during the
first half of the year and subsequently increases during the second half of the
year. Furthermore, gross revenues generally increase in the fourth quarter
primarily due to salary increases and bonuses that client companies award their
employees during this period.
Loss Per Share
Loss per share, in accordance with the provisions of Financial Accounting
Standards Board No. 128. "Earnings Per Share," is computed by dividing the net
loss by the weighted average number of common shares outstanding during the
period. The effect of the Company's Series A, 10% cumulative convertible
preferred stock, Class A warrants, Class B warrants and outstanding stock
options would be anti-dilutive.
Securities Issued for Services
The Company accounts for common stock issued for services by reference to the
fair market value of the Company's stock on the date of stock issuance.
Compensation and consulting expenses are recorded at the fair market value of
the stock issued.
Advertising Costs
Advertising costs are charged to operations when incurred. Advertising expense
was $13,138 and $7,909 for the nine months ended June 30, 2003 and 2002,
respectively.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes, as
applicable. Deferred taxes relate to the differences between financial reporting
and income tax carrying amounts of assets and liabilities. The deferred tax
assets and liabilities represent the future tax return consequences of those
differences, which will be either taxable or deductible when the assets and
liabilities are recovered or settled. Deferred taxes also are recognized for
operating losses that are available to offset future federal and state income
taxes.
CONCENTRATIONS OF BUSINESS AND CREDIT RISK
At times throughout the year, the Company may maintain certain bank accounts in
excess of FDIC insured limits.
The Company provides credit in the normal course of business. The Company
performs ongoing credit evaluations of its customers and does not maintain an
allowance for doubtful accounts because management believes all accounts
receivable are collectible.
PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following at September 30,
2003:
8
Computer equipment and software $ 128,376
Office furniture 4,500
------------------
Total 132,876
Less: accumulated depreciation 69,142
------------------
Total $ 63,734
------------------
Depreciation expense charged to operations amounted to $10,218 and $14,912 for
the nine months ended September 30, 2003 and 2002, respectively.
CUSTOMER LISTS
On April 1, 2001, the Company acquired a customer list from a vendor in exchange
for the forgiveness of advances and the assumption of liabilities which net to
$587,600. The customer list is being amortized on a straight-line basis over 10
years.
On December 23, 2002, the Company acquired a customer list from a competitor. In
consideration thereof, the Company paid $5,000 on December 23, 2002 and agreed
to pay $40,000 over a period of eight months commencing February 2003. As of
June 30, 2003, the amount due under the agreement was $25,000 and is included in
accrued expenses. The customer list is being amortized on a straight-line basis
over ten years.
Amortization expense was charged to operations amounted to $34,818 and $53,430
for the nine months ended September 30, 2003 and 2002, respectively.
EMPLOYEE BENEFIT PLANS
Medical Benefit Plans
The Company offers fully-insured and self-insured medical benefits to employees.
Participating employer clients may participate or opt to offer their own
insurance coverage to employees. The Company's self-insured plan is a
self-funded employee welfare benefit plan pursuant to the Employee Retirement
Income Security Act of 1974, as amended. The plan administration is provided by
a third party Claims Supervisor for claim form submissions, correspondence,
benefit determinations, claim processing and disbursement preparation. All
eligible employees may participate in the welfare benefit plan upon satisfaction
of the waiting period, completion of enrollment documents and meeting
eligibility requirements. Participating employees contribute to the cost of
their coverage premiums through payroll deductions. Such payroll deductions are
recorded as revenue when billed to client employers. The plan offers Network and
Non-Network Provider Organization medical services, hospital services, inpatient
and outpatient treatment, prescription drug, vision care and dental benefits.
Accrued Health Insurance Plan Claims under the self-funded employee welfare
benefit plan amounted to $884,495, and consists of amounts due to providers
based on claims filed and estimates of claims incurred before September 30, 2003
but not reported.
9
LONG-TERM DEBT
Long-term debt is comprised of the following:
Installment Notes
Interest at 14.87% due in monthly installments of $864 including interest
through June 2006 secured by computer software with a net book value of $22,918 $ 23,851
Interest at 15.3% due in monthly installments of $239 including interest through 4,831
December 2005 secured by equipment with a net book value of $2,513
15,254
Interest at 15.3% due in monthly installments of $599 including interest
through May 2006 secured by equipment with a net book value of $14,583
39,327
Interest at 10% due in monthly installments of $1,033 including interest through April
2007
6,019
Interest at 14.2% due in monthly installments of $901 including interest
through April 2004 secured by equipment with a net book value of $12,782
------------------
Total 89,282
Less Current Maturities 27,603
------------------
Long-Term Debt, Net of Current Maturities $ 61,679
------------------
Total maturities of long-term debt are as follows:
Period Ended September 30,
2004 $ 27,603
2005 26,633
2006 24,876
2007 10,170
------------------
$ 89,282
------------------
INCOME TAXES
The provision for income taxes consists of the following:
September 30,
----------------------------------
2003 2002
--------------- ---------------
Current
Federal $ - $ -
State - -
--------------- ---------------
$ - $ -
--------------- ---------------
The components of the Company's deferred tax asset is as follows:
Federal and State Net Operating Losses $ 210,000
Less: Valuation Allowances (210,000)
---------------------
Net Deferred Tax Assets $ -
---------------------
The differences between income tax provision in the financial statements and the
tax benefit computed at the U.S. Federal statutory rate of 34% at September 30,
2003 are as follows:
Tax Benefit (34%)
Valuation Allowance 34%
---------------
Effective Tax Rate - %
---------------
10
OPERATING LEASE COMMITMENTS
The Company leases certain office space under an operating lease. The lease
expires September 30, 2003 and contains a renewal option for an additional two
years.
Rent expense for the period ended September 30, 2003 and 2002 was $31,498 and
$32,000, respectively.
EQUITY COMPENSATION PLAN
During the year, the Company adopted the 2003 Equity Compensation Plan ("The
2003 Plan"). Under the 2002 Plan the Company may grant either restricted shares
or options to purchase up to 3 million shares of common stock in the aggregate.
Under the terms of the 2003 plan, common stock or options may be granted to
officers, directors, employees and independent consultants of the Company who
are responsible for the management, growth or profitability of the Company as
determined by the 2003 Plan Committee. The 2003 Plan is in effect for a term of
10 years.
On February 8, 2003, the Company issued 50,000 shares under the 2003 Plan to a
consultant. An amount of $20,000 relating to these shares was recognized based
on the fair market value of the shares on the date of issuance.
On April 10, 2003, the Company issued 5,400,000 options to its CEO, 1,000,000
options to an employee and 2,550,000 options to an advisor as compensation for
consulting services. Each anniversary, the Company shall grant additional
options in the same proportion to these individuals for 5 years.
On May 6, 2003, AAMPRO Group, Inc. acquired a 20% stake in a California based
security company Security 20/20, Inc. (dba SecurityProUSA). Consideration for
the equity stake were 300,000 stock options in AAMPRO at $.17 and an additional
300,000 incentive based stock options at $.25 per share.
On June 16, the Company issued 1,838,343 shares of its common stock as an
investment in Cross Capital Fund, L.L.C.
On June 25, 2003, the Company issued 1,800,000 shares for a consultant pursuant
to the Company's 2003 equity compensation plan.
During the period ended June 30, 2003, the Company granted stock options to
various consultants under the 2003 equity plan. In addition, the Company granted
stock options in connection with its asset purchase of Amstaff, Inc.
In July 2003, the Company issued 2,924,000 shares to a consultant pursuant to
the Company's 2003 equity plan.
On September 3, 2003, the Company issued 750,000 shares of its common stock for
a 10% investment in SK Realty.
On September 4, 2003, the Company issued 1,250,000 shares of its common stock
for a 10% investment in Jason Hawk Enterprises.
The value of each option granted is estimated on the date of the grant using the
Black - Scholes option pricing model using the following weighted average
assumptions:
Weighted average risk free interest rate 1.4-1.5%
Expected dividend yield 0%
Expected volatility 115-120%
Expected lives (in years) 1-5
On September
11
The following is a summary of the status of the stock options during the period
ended September 30, 2003:
Weighted
Average
Number of Exercise
Options Price
--------------- ------------
Outstanding at December 31, 2002 1,500,000 $ 0.01
Options granted 10,650,000 0.09
Options exercised (1,755,000) 0.02
Options forfeited (645,000) 0.12
---------------
Outstanding at September 30, 2003 9,750,000 $ 0.08
---------------
The following table summarizes information about stock options outstanding at
September 30, 2003:
Range of Weighted Average Weighted
Exercise Number Remaining Average
Prices Outstanding Contractual Life Exercise Price
- -------------------- ---------------- ----------------------- --------------------
$0.17 300,000 21.5 months $0.17
$0.07 5,400,000 58 months $0.07
$0.07 2,550,000 58 months $0.07
$0.07 900,000 58 months $0.07
$0.25 600,000 6 months $0.25
All options outstanding at September 30, 2003 are exercisable.
ACQUISITION
On January 14, AAMPRO Group, Inc. acquired the assets of Amstaff, Inc. via an
asset purchase. In conjunction with this acquisition, AAMPRO formed a new
subsidiary entitled AAMPROPAY, LLC to enter into the computerized payroll
services sector. On January 31, 2003, the parties modified their agreement so
that Amstaff executed a five (5) year promissory note in favor of AAMPRO to for
$244,193 for the outstanding accounts receivable due AAMPRO. Payments of $1,264
constituting principal and interest will be paid monthly based on a thirty year
amortization and will commence on July 14, 2003. The note is secured by all
remaining assets of Amstaff, as well as, the stock and stock options of AAMPRO
which are held by Amstaffs' sole Officer and Director.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report contains forward-looking statements about our
business, financial condition and prospects that reflect our assumptions and
beliefs based on information currently available. We can give no assurance that
the expectations indicated by such forward-looking statements will be realized.
If any of our assumptions should prove incorrect, or if any of the risks and
uncertainties underlying such expectations should materialize, our actual
results may differ materially from those indicated by the forward-looking
statements.
The key factors that are not within our control and that may have a
direct bearing on operating results include, but are not limited to, acceptance
of our services, our ability to expand our customer base, our ability to raise
capital in the future, the retention of key employees and changes in the
regulation of our industry. There may be other risks and circumstances that we
are unable to predict. When used in this Quarterly Report, words such as,
"believes," "expects," "intends," "plans," "anticipates," "estimates" and
similar expressions are intended to identify forward-looking statements,
although there may be certain forward-looking statements not accompanied by such
expressions. All forward-looking statements are intended to be covered by the
safe harbor created by Section 21E of the Securities Exchange Act of 1934.
12
Overview
AAMPRO Group, Inc., together with its consolidated subsidiaries, is a
professional employer organization ("PEO") that provides a broad range of
services comprised primarily of employee leasing and human resources management.
These services include payroll and benefits administration, health and workers'
compensation insurance programs, state and federal labor compliance, tax
filings, safety program design and management and other related services to
small and medium-sized businesses nationally with a primary concentration in the
tri-state (New York/New Jersey/Pennsylvania) marketplace.
The Company 's services are designed to improve the productivity and
profitability of small and medium-sized businesses by relieving business owners
and key executives of many employer-related administrative and regulatory
burdens and enables them to focus on the core competencies of their businesses.
The Company provides services by entering into a Client Service Agreement, which
establishes a relationship whereby the Company acts as employer of the employees
who work at the client's location ("worksite employees"). Under the Client
Service Agreement, the Company becomes the employer of the worksite employees
and assumes responsibility for personnel administration and compliance with most
employment-related governmental regulations. The Company charges a comprehensive
service fee, which is invoiced concurrently with the processing of payroll for
the worksite employees of the client. The fee is based upon the gross payroll of
each client and the Company's estimated cost of providing the services.
The Company provides its services on a national basis with a primary
focus in the New York, New Jersey and Pennsylvania area and is currently
executing a long-term expansion strategy targeting both organic growth and the
acquisition of smaller and like-sized competitors.
Results of Operations
The following discussion should be read in conjunction with the
consolidated financial statements and related notes included elsewhere herein.
Historical results and percentage relationships are not necessarily indicative
of the operating results for any future period. Within this discussion and
analysis, all dollar amounts (except for per share amounts) have been rounded to
the nearest thousand.
NET REVENUES
Our overall revenues increased to $15,408,891 during the nine month
period ended September 30, 2003 as compared to $12,948,951 for the same period
in 2002. This was an increase of 19%. All of our revenues were from our AAMPRO,
Inc. subsidiary. This was primarily attributable to the acquisition of a client
list and from new marketing efforts.
COST OF REVENUES AND GROSS MARGIN
AAMPRO's cost of revenues is composed primarily of:
o Client and Client Employee Payrolls
o Benefits Premium and Administration
o Federal and State Income Tax and Payroll Tax
Cost of revenues, as a percentage of net revenues decreased to 96.1% in
2003 from 97.5% in 2002 primarily due to efficiencies in operations achieved
through revenue growth.
Operating Expenses
Operating expenses are composed principally of marketing and sales
expenses and general and administrative expenses which are composed principally
of salaries of administrative personnel, fees for professional services and
facilities. Operating expenses increased to $1,319,565 for the nine month period
ended September 30, 2003 from $450,768 during the same period in 2002. This
increase was mostly due to the transition from a private company to a public
company, mergers and acquisition related expenses, as well as, the
implementation of the new marketing plan for both AAMPRO, Inc. and the newly
founded AAMPROPAY, LLC and stock based compensation issued to consultants The
2003 figures for G&A include fees associated with the Company transitioning to a
public company with the requisite reporting requirements. Furthermore, in order
to position the company for growth and development, it was necessary to retain
several consultants on behalf of the Company. By retaining consultants instead
hiring additional staff, the Company was able to save on usual and customary
benefits and payroll taxes. Furthermore, the consultants were paid either
through the issuance of stock and\or stock options which preserved cash flow.
13
Provision for Income Taxes
INCOME TAXES
The Company switched from Subchapter S status to C corp. commencing in
the fourth quarter of 2002. The Company will receive the benefit of its net
operating loss for the fourth quarter of 2002 as well as for the nine month
period ending September 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003, we had cash and cash equivalents totaling
$100,264.
Net cash used by operating activities during the nine months ended
September 30, 2003 was $196,731 as compared to net cash generated by investment
of $111,781 during the same period in 2002.
Net cash provided by financing activities in the nine months ended
September 30, 2003 was $89,576 [e.g. payments on capital leases], as compared
with ($81,875) used in 2002.
Our capital requirements are dependent on several factors, including
marketing, acquisitions, professional fees and consulting expenses.
We believe that our current cash and cash equivalents along with cash
to be generated by operations in 2003 will be sufficient to meet our anticipated
cash needs for working capital and capital expenditures for the next fiscal
year.
If cash generated from operations is insufficient to satisfy our
liquidity requirements, we may seek to sell additional equity or debt securities
or obtain a credit facility. The sale of additional equity or convertible debt
securities could result in additional dilution to our stockholders. The
incurrence of indebtedness would result in an increase in our fixed obligations
and could result in borrowing covenants that would restrict our operations.
There can be no assurance that financing will be available in amounts or on
terms acceptable to us, if at all. If financing is not available when required
or is not available on acceptable terms, we may be unable to develop or enhance
our products or services. In addition, we may be unable to take advantage of
business opportunities or respond to competitive pressures. Any of these events
could have a material and adverse effect on our business, results of operations
and financial condition.
RISKS AND UNCERTAINTY
Our business is subject to the effects of general economic conditions,
and in particular competition and government regulation.
Other risks and uncertainties for the Company include, but are not
limited to:
o Adverse changes in general economic conditions in any of the
countries in which we do business, including the U.S., Europe, Japan
and other geographic areas
o We might not be able to fund its working capital needs from cash
flows
o Increased competition
o Litigation
o State Unemployment and Disability taxes payable
We may experience material fluctuations in future revenues and
operating results on a quarterly or annual basis resulting from a number of
factors, including but not limited to the risks discussed above. In November,
2003 the State of New Jersey granted the Company an extension until December 1,
2003 to pay the certain Unemployment and Disability taxes which are in arrears.
In the event that the Company does not pay such taxes during this period, the
State may alter the status of the Company as PEO. The Company is attempting to
negotiate a payment plan or settlement with the State of New Jersey.
The preceding statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" which are not historical facts
are forward-looking statements. These forward-looking statements involve risks
and uncertainties that could render them materially different, including, but
not limited to, the risk that new products and product upgrades may not be
available on a timely basis, the risk that such products and upgrades may not
achieve market acceptance, the risk that competitors will develop similar
products and reach the market first, and the risk that we would not be able to
fund its working capital needs from cash flow.
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Critical Accounting Policies
Revenue Recognition and Returns
Revenue is recognized as services are provided. Billing to the Company's clients
is based on the average annual cost for services spread in equal payments over
the clients' annual billing cycle. Billings do not reflect actual expenses
incurred due to the front loading and subsequent phase-out of expenses and
taxes. As a direct result of this averaging, net income is decreased during the
first half of the year and subsequently increases during the second half of the
year. Furthermore, gross revenues generally increase in the fourth quarter
primarily due to salary increases and bonuses that client companies award their
employees during this period.
ITEM 3: LEGAL PROCEEDINGS
In August, 2003, a law suit for breach of contract was commenced against the
Company and Stephen Farkas by a shareholder alleging breach of contract related
to the acquisition of AAMPRO, Inc. by the Company. The Company has
counterclaimed and is vigorously defending this action.
ITEM 4: PROCEDURES AND CONTROLS
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), within 90 days of the filing date of this report.
Based on their evaluation, our principal executive officer and principal
accounting officer concluded that the Company's disclosure controls and
procedures are effective.
There have been no significant changes (including corrective actions with regard
to significant deficiencies or material weaknesses) in our internal controls or
in other factors that could significantly affect these controls subsequent to
the date of the evaluation referenced in the above paragraph.
PART II
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
---------
31 Certification of Chief Executive Officer and Chief
Financial Officer, as required by Rule 13a-14(a) of the
Securities Exchange Act of 1934
32 Certification of Chief Executive Officer, as required
by Rule 13a-14(b) of the Securities Exchange Act of
1934
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
By /s/ Stephen Farkas
------------------------------
(Stephen Farkas, President, Chief Executive Officer,
Principal Accounting Officer and Director)
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