<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
Current Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (date of earliest event reported): June 17, 1999
SKYNET HOLDINGS, INC.
---------------------
(Exact name of registrant as specified in its charter)
Delaware 0-25229 65-0861800
---------------- --------------------- -------------------
(State or other (Commission File No.) (IRS Employer
jurisdiction of Identification No.)
incorporation)
343 South Glasgow Avenue
Inglewood, CA 90301
----------------------------------------
(Address of principal executive office)
Registrant's telephone number, including area code: (310) 642-7776
--------------
------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
GENERAL EXPLANATION
The purpose of this Report is to amend Skynet Holdings, Inc. (the
"Company") Current Report on Form 8-K dated June 17, 1999 relative to the
acquisition of Pony Delivery Express, Inc. ("PONY"), a corporation organized
under the laws of Delaware. This report amends the information provided under
Item 7(a) and 7(b).
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Acquired Business
See the index at Page F-1 of this report for the historical financial
statements of PONY for the three years ended December 31, 1998.
(b) Pro Forma Financial Information
See index at Page F-1 of this report for the pro forma financial
information of the Company for the year ended June 30, 1998 and the
nine months ended March 31, 1999.
(c) Exhibits
None
2
<PAGE>
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.
Dated: August 19, 1999 SKYNET HOLDINGS, INC.
BY: /s/Vjekoslav Nizic
-------------------
Vjekoslav Nizic
President
3
<PAGE>
SKYNET HOLDINGS, INC.
Index To Financial Statements
-----------------------------
<TABLE>
<CAPTION>
Pro Forma Condensed Combined Financial Statements of the Company
Skynet Holdings, Inc.
<S> <C>
Introduction........................................................... F-2
Pro Forma Condensed Combined Balance Sheet as of March 31, 1999........ F-3
Pro Forma Condensed Combined Statements of Operations for the
Year ended June 30, 1998 and the nine months ended March 31, 1999... F-4
Notes to Pro Forma Condensed Combined Financial Statements............. F-5
Financial Statements of Acquired Company
Pony Express Delivery Services, Inc.
Report of Independent Certified Public Accountants..................... F-7
Consolidated Balance Sheets............................................ F-8
Consolidated Statements of Operations.................................. F-9
Consolidated Statements of Stockholders' Equity (Deficit).............. F-10
Consolidated Statements of Cash Flows.................................. F-11
Notes to Consolidated Financial Statements............................. F-12
Condensed Consolidated Balance Sheets.................................. F-23
Condensed Consolidated Statements of Operations........................ F-24
Condensed Consolidated Statements of Cash Flows........................ F-25
Notes to Condensed Consolidated Financial Statements................... F-26
</TABLE>
F-1
<PAGE>
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
On June 17, 1999, we acquired all the outstanding shares of capital stock
of Pony Express Delivery Service, Inc., a Delaware corporation, ("PONY"), a
courier delivery service operating in 22 states in the USA with annual revenues
of approximately $100 million. The consideration included 600,000 shares of the
Company's Common Stock and 848,808 shares of the Company's Series B Convertible
Preferred Stock. The acquisition was accounted for using the purchase method of
accounting with the assets acquired and liabilities assumed recorded at fair
values, and the results of the acquired business will be included in our
consolidated financial statements from the closing date of the acquisition.
On April 12, 1999, we completed the first tier of a scheduled two-tiered
acquisition of Freight on Board International Limited, a corporation organized
under the laws of the United Kingdom ("FOB"). At the initial closing, the
Company purchased 51% of the issued and outstanding shares of FOB for cash in
the amount of approximately $680,000; 31,119 shares of Common Stock; and a one
(1) year cash earn-out payment in the amount of up to $144,000 based on
quarterly revenues of FOB for the one year period following the closing. The
Company purchased the remaining 49% during the first week of July 1999 for
approximately $570,000. The acquisition was accounted for using the purchase
method of accounting with the assets acquired and liabilities assumed recorded
at fair values, and the results of the acquired business included in our
consolidated financial statements from the closing date of the acquisition.
On March 15, 1999, we acquired the operating assets of Nevada Fleet
Management, Inc., a Nevada corporation, d.b.a. Fleet Delivery Service ("Fleet"),
a courier delivery service operating in the states of Nevada, Arizona,
California, Oregon and Washington. The consideration amounted to $3,059,000
(including approximately $100,000 acquisition costs) with the Company issuing
1,479,415 shares of its Common Stock. The assets acquired include accounts
receivable, delivery vehicles, equipment, refundable deposits, licenses,
administrative material and equipment, records and documents, and all personal
property used in the operation of the business. The acquisition was accounted
for using the purchase method of accounting with the assets acquired and
liabilities assumed recorded at fair values, and the results of the acquired
business included in the Company's consolidated financial statements from the
closing date of the acquisition.
During April 1999, the Company completed a private placement of 2,003,560
shares of Series A Convertible Preferred Stock, which generated net proceeds
(after offering costs of approximately $600,000) of approximately $4,000,000.
On June 1, 1999, the Company completed a bridge loan in the amount of
$3,000,000 that is due and payable October 1, 1999 unless extended. The bridge
loan can be converted into 600,000 shares of the Company's common stock plus
warrants to purchase 150,000 shares of common stock at an exercise price of
$5.00 per share. Loan costs incurred in connection with the bridge loan
approximated $150,000 plus warrants to purchase 75,000 shares at $5.00 per
share.
F-2
<PAGE>
The unaudited pro forma condensed combined statements of operations and
balance sheet presented below reflect the acquisitions; the completion of the
private placement of the Series A Convertible Preferred Stock and the bridge
loan, all described above. The pro forma condensed combined statements of
operations are presented as if these transactions had taken place at July 1,
1998. The pro forma condensed combined balance sheet is presented as if such
transactions had taken place on March 31, 1999 with the exception of the Fleet
acquisition that occurred on March 15, 1999. The pro forma condensed combined
financial statements should be read in conjunction with the Company's historical
financial statements and notes thereto for the year ended June 30, 1998 (not
included herein) and the historical financial statements of PONY and related
notes. The unaudited pro forma financial statements are not necessarily
indicative of what the actual results of operations would have been had such
transactions occurred on July 1, 1998, or what our results of operations will be
in the future.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
As of March 31, 1999
Skynet Pro Forma Pro Forma
Holdings PONY FOB Adjustments(A) Combined
-------------- ---------------- -------------- --------------------- -----------
<S> <C> <C> <C> <C> <C>
Assets:
$ (371,500)(1)
(1,350,000)(2)
4,000,000 (3)
Current assets $ 9,440,298 $ 13,319,976 $2,181,243 2,850,000 (4) $30,070,017
Property and
equipment, net 1,036,371 7,928,762 141,767 9,106,900
(3,339,945)(1)
1,258,617 (2)
Intangibles and other 2,060,696 13,414,560 67,022 150,000 (4) 13,610,950
----------- ------------ ---------- -----------
Totals $12,537,365 $ 34,663,298 $2,390,032 $52,787,867
=========== ============ ========== ===========
Liabilities:
(900,000)(1)
Current Liabilities $ 7,427,181 $ 26,301,968 $2,236,411 3,000,000 (4) $38,065,560
Long-term debt 531,050 22,388,912 - (20,098,845)(1) 2,821,117
----------- ------------ ---------- -----------
Total Liabilities 7,958,231 48,690,880 2,236,411 40,886,677
17,287,400 (1)
(91,383)(2)
Stockholders' Equity 4,579,134 (14,027,582) 153,621 4,000,000 (3) 11,901,190
----------- ------------ ---------- -----------
Totals $12,537,365 $ 34,663,298 $2,390,032 $52,787,867
=========== ============ ========== ===========
</TABLE>
F-3
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
Nine Months Ended March 31, 1999
<TABLE>
<CAPTION>
Skynet Pro forma Pro forma
Holdings PONY Fleet FOB Adjustments(B) Combined
------------- -------------- ----------- ----------- ------------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $25,609,176 $108,532,509 $9,508,667 $7,424,646 $(22,581,091)(5) $128,493,907
(29,006,766)(5)
Costs and expenses 26,500,414 125,006,777 9,269,432 7,508,563 21,000 (6) 137,615,527
----------- ------------ ---------- ---------- ------------
Income (loss) from operations (891,238) (16,474,268) 239,235 (83,917) (9,121,620)
(82,023)(5)
Other expense, net (569,038) (1,069,516) (12,893) - 12,893 (7) (1,720,577)
------------ ------------ ---------- ---------- ------------
Income (loss) before income taxes (1,460,276) (17,543,784) 226,342 (83,917) (10,842,197)
Income taxes (4,800) - - - (4,800)
----------- ------------ ---------- ---------- ------------
Net income (loss) $(1,465,076) $(17,543,784) $ 226,342 $ (83,917) $(10,846,997)
=========== ============ ========== ========== ============
Basic net loss per share (8) $ (0.09) $ (0.59)
=========== ============
Diluted net loss per share (8) $ (0.09) $ (0.59)
=========== ============
Basic weighted average
shares outstanding(8) 16,352,761 18,463,295
=========== ============
Diluted weighted average
shares outstanding (8) 16,352,761 18,463,295
=========== ============
</TABLE>
Year Ended June 30, 1998
<TABLE>
<CAPTION>
Skynet Pro forma Pro forma
Holdings PONY Fleet FOB Adjustments(B) Combined
------------- -------------- ------------ ----------- ------------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $31,838,919 $137,975,739 $13,406,567 $9,562,305 $(39,133,874) (5) $153,649,656
(45,290,391) (5)
Costs and expenses 31,257,942 149,620,737 14,195,444 9,576,859 38,000 (6) 159,398,591
----------- ------------ ----------- ---------- ------------
Income (loss) from operations 580,977 (11,644,998) (788,877) (14,554) (5,748,935)
(21,863)(5)
189,034 (6)
Other expense, net (229,523) (1,538,949) (186,938) - (1,788,239)
----------- ------------ ----------- ---------- ------------
Income (loss) before income taxes 351,454 (13,183,947) (975,815) (14,554) (7,537,174)
Income taxes (185,404) - - - (185,404)
----------- ------------ ----------- ---------- ------------
Net income (loss) $ 166,050 $(13,183,947) $ (975,815) $ (14,554) $ (7,722,578)
=========== ============ =========== ========== ============
Basic net income (loss)
per share (8) $ 0.02 $ (0.72)
=========== ============
Diluted net income (loss)
per share (8) $ 0.02 $ (0.72)
=========== ============
Basic weighted average 7,346,500 10,782,534
shares outstanding(8) =========== ============
Diluted weighted average 10,782,534
shares outstanding (8) 9,796,500 ============
===========
</TABLE>
F-4
<PAGE>
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Note A - Pro forma adjustments to the condensed balance sheet are as follows:
(1) To record the acquisition of PONY and the allocation of the purchase price
on the basis of the fair values of the assets acquired and liabilities
assumed. The consideration included Cash of $121,500, 600,000 shares of the
Company's Common Stock and 848,808 shares of the Company's Series B
Convertible Preferred Stock. Acquisition costs approximated $250,000.
<TABLE>
<CAPTION>
Allocation of purchase price is as follows: Historical Purchase
Allocation Cost Adjustment
----------- ---- ----------
<S> <C> <C> <C>
Current assets acquired........................................ $ 13,319,976 $ 13,319,976 $ -
Property and equipment......................................... 7,928,762 7,928,762 -
Intangible and other assets.................................... 10,074,615 13,414,560 (3,339,945)
Current liabilities............................................ (25,401,968) (26,301,968) 900,000
Long-term debt................................................. (2,290,067) (22,388,912) 20,098,845
Stockholders' equity........................................... (3,259,818) 14,027,582 (17,287,400)
------------ ------------ ------------
Cash portion.................................................. $ 371,500 $ - $ 371,500
============ ============ ============
</TABLE>
(2) To record the acquisition of FOB and the allocation of the purchase price on
the basis of the fair values of the assets acquired and liabilities assumed.
The consideration included cash of $1,250,000 and 33,191 shares of the
Company's Common Stock. Acquisition costs approximated $100,000.
<TABLE>
<CAPTION>
Allocation of purchase price is as follows:
Historical Purchase
Allocation Cost Adjustment
---------- ---- ---------
<S> <C> <C> <C>
Current assets acquired....... $ 2,181,243 $ 2,181,243 $ -
Property and equipment........ 141,767 141,767 -
Intangible and other assets... 1,325,639 67,022 1,258,617
Current liabilities........... (2,236,411) (2,236,411) -
Stockholders' equity.......... (62,238) (153,621) 91,383
----------- ----------- ----------
Cash portion................. $ 1,350,000 $ - $1,350,000
=========== =========== ==========
</TABLE>
(3) To record the net proceeds of $4,000,000 from the sale of 2,003,560 shares
of our Series A Convertible Preferred Stock at $2.25 per share.
(4) To record bridge loan in the amount of $3,000,000 received on June 1, 1999.
Loan costs incurred in connection with the bridge loan approximated $150,000
plus warrants to purchase 75,000 shares at $5.00 per share.
F-5
<PAGE>
Note B - Pro forma adjustments to the condensed statements of operations are as
follows:
(5) To eliminate operations of PONY and Fleet locations not acquired.
(6) To adjust depreciation expense based on the revised values of the
depreciable assets acquired and amortization of the excess of the fair
value over net assets acquired as follows:
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended June 30, 1998 March 31, 1999
-------------------------------- ---------------------
PONY Fleet FOB PONY Fleet FOB
----------- -------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Historical depreciation............. $1,996,000 $ 76,000 $63,000 $1,596,000 $51,000 $31,000
Revised depreciation................ 1,848,000 96,000 63,000 1,485,000 71,000 31,000
---------- -------- ------- ---------- ------- -------
Increase (decrease).............. (148,000) 20,000 - (111,000) 20,000 -
Amortization of excess of fair
value over net assets acquired... - 116,000 50,000 - 75,000 37,000
---------- -------- ------- ---------- ------- -------
Net increase (decrease)............. $ (148,000) $136,000 $50,000 $ (111,000) $95,000 $37,000
========== ======== ======= ========== ======= =======
</TABLE>
(7) To eliminate interest expense of Fleet.
(8) Weighted average shares outstanding were adjusted on a pro forma basis to
include 2,010,415 shares of Common Stock issued in connection with the
acquisitions plus 1,325,500 shares issued in the private placement in
February 1999.
F-6
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors of
Pony Express Delivery Services, Inc.
Atlanta, Georgia
We have audited the accompanying consolidated balance sheets of Pony Express
Delivery Services, Inc. as of December 31, 1998, May 28, 1998, December 31, 1997
and 1996, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for the period from May 29, 1998 through
December 31, 1998, the period from January 1, 1998 through May 28, 1998, and
each of the years ended December 31, 1997 and 1996. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pony Express
Delivery Services, Inc. as of December 31, 1998, May 28, 1998, December 31, 1997
and 1996, and the results of their operations and their cash flows for each of
the periods then ended in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered significant recurring losses from
operations and at December 31, 1998, had a net capital deficiency that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
As discussed in Note 2 to the consolidated financial statements, effective May
29, 1998, the outstanding shares of common stock of the Company were sold by
Borg-Warner Security Corporation to Mustang Holdings, Inc., in a business
combination accounted for as a purchase. Accordingly, the carrying values of the
Company's assets and liabilities as well as the Company's results of operations
and cash flows for the period from May 29, 1998 through December 31, 1998 are
not necessarily comparable to such financial data for periods prior to May 29,
1998.
/s/ BDO Seidman, LLP
Atlanta, Georgia
July 16, 1999
F-7
<PAGE>
Pony Express Delivery Services, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
Sucessor
Company Predecessor Company
-------------- ----------------------------------------------------
December 31,
December 31, May 28, --------------------------------
1998 1998 1997 1996
------------- ------------- ------------- -------------
Assets
Current
<S> <C> <C> <C> <C>
Cash $ 695,404 $ 614,876 $ 147,572 $ 320,670
Trade accounts receivable, net of
allowance for doubtful accounts
of $1,529,000, $2,201,091,
$1,252,662 and $391,650 12,230,237 9,580,078 8,245,147 3,088,177
Due from Borg-Warner Security Company 946,572 - - 7,743,154
Prepaid expenses and other current assets 1,087,837 344,321 483,538 581,203
----------- ------------ ------------ ------------
Total current assets 14,960,050 10,539,275 8,876,257 11,733,204
Property and equipment, net (Notes 4 and 5) 8,487,683 5,279,800 6,264,940 9,155,773
Goodwill (Note 1) 12,922,981 - - -
Other assets 1,040,291 510,264 428,548 509,325
----------- ------------ ------------ ------------
$37,411,005 $ 16,329,339 $ 15,569,745 $ 21,398,302
=========== ============ ============ ============
Liabilities and Stockholders' Equity
Current liabilities
Bank overdraft $ 3,461,274 $ 3,855,416 $ 3,406,951 $ 1,891,478
Accounts payable 5,138,805 2,475,495 2,523,010 2,644,692
Accrued liabilities 5,821,911 1,723,238 2,570,082 3,551,949
Revolving credit facility (Note 5) 6,884,529 - - -
Current maturities of long-term debt
(Note 5) 352,412 - - -
Current maturities of capitalized lease
obligations (Note 6) - - 53,332 1,020,424
Due to Borg-Warner Security Company - 9,961,881 1,796,600 -
----------- ------------ ------------ ------------
Total current liabilities 21,658,931 18,016,030 10,349,975 9,108,543
Long-term debt, net of current maturities
(Note 5) 21,451,839 - - -
Other long-term liabilities (Note 9) 779,117 - - -
Capitalized lease obligations, net of
current maturities (Note 6) - - 4,565 90,535
----------- ------------ ------------ ------------
Total liabilities 43,889,887 18,016,030 10,354,540 9,199,078
----------- ------------ ------------ ------------
Commitments and contingencies
(Notes 5, 7, 8, 9, 10 and 11)
Stockholders' equity (deficit)
Common stock, $.10 par value; 100 shares
authorized, issued and outstanding - 10 10 10
Additional paid-in capital 1,950,000 31,489,744 31,489,744 31,489,744
Accumulated deficit (8,428,882) (33,176,445) (26,274,549) (19,290,530)
----------- ------------ ------------ ------------
Total stockholders' equity (deficit) (6,478,882) (1,686,691) 5,215,205 12,199,224
----------- ------------ ------------ ------------
$37,411,005 $ 16,329,339 $ 15,569,745 $ 21,398,302
=========== ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-8
<PAGE>
Pony Express Delivery Services, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Successor
Company Predecessor Company
------------------- -------------------------------------------------------------------------
Period Year ended
May 29, 1998 Period January 1, December 31,
through 1998 through ----------------------------------------------
December 31, May 28,
1998 1998 1997 1996
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Revenues $83,141,154 $54,403,111 $141,463,728 $139,960,102
Cost of services 69,561,365 55,779,415 138,863,080 133,387,571
----------- ----------- ------------ ------------
Gross profit (loss) 13,579,789 (1,376,304) 2,600,648 6,572,531
Selling, general and
administrative
expenses (21,314,327) (5,319,380) (11,950,290) (11,067,634)
Impairment write-down - - - (18,584,862)
----------- ----------- ------------ ------------
Operating loss (7,734,538) (6,695,684) (9,349,642) (23,079,965)
Interest expense 694,344 206,212 1,592,377 779,353
----------- ----------- ------------ ------------
Loss before income tax
benefit (8,428,882) (6,901,896) (10,942,019) (23,859,318)
Income tax benefit (Note 7) - (2,607,000) (4,116,000) (3,368,000)
----------- ----------- ------------ ------------
Net loss $(8,428,882) $(4,294,896) $ (6,826,019) $(20,491,318)
=========== =========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-9
<PAGE>
Pony Express Delivery Services, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
Periods Ended December 31, 1998, May 28, 1998, December, 31 1997 and 1996
<TABLE>
<CAPTION>
Common Stock Additional Retained Earnings
-------------------------------- Paid-in (Accumulated
Shares Amount Capital Deficit) Total
---------- --------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 100 $10 $ 31,489,744 $ 4,568,788 $ 36,058,542
Distribution of tax
benefit (Note 7) - - - (3,368,000) (3,368,000)
Net loss - - - (20,491,318) (20,491,318)
---------- --------------- ------------ ------------ ------------
Balance,
December 31, 1996 100 10 31,489,744 (19,290,530) 12,199,224
Distribution of tax
benefit (Note 7) - - - (158,000) (158,000)
Net loss - - - (6,826,019) (6,826,019)
---------- --------------- ------------ ------------ ------------
Balance,
December 31, 1997 100 10 31,489,744 (26,274,549) 5,215,205
Distribution of tax
benefit (Note 7) - - - (2,607,000) (2,607,000)
Net loss - - - (4,294,896) (4,294,896)
---------- --------------- ------------ ------------ ------------
Closing balance,
May 28, 1998 100 $ 10 $ 31,489,744 $(33,176,445) $ (1,686,691)
========== =============== ============ ============ ============
- -----------------------------------------------------------------------------------------------------------------------------------
Opening balance,
May 29, 1998 100 $ 10 $ 31,489,744 $(33,176,445) $ (1,686,691)
Adjustment upon
purchase of stock of
the Company by
Mustang Holdings, - (10) (31,489,744) 33,176,445 1,686,691
Inc. (Note 3)
Capital contribution - - 1,950,000 - 1,950,000
Net loss - - - (8,428,882) (8,428,882)
---------- --------------- ------------ ------------ ------------
Balance,
December 31, 1998 100 $ - $ 1,950,000 $ (8,428,882) $ (6,478,882)
========== ============== ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-10
<PAGE>
Pony Express Delivery Services, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Successor
Company Predecessor Company
------------- -----------------------------------------------------------
Period Period
May 29, 1998 January 1, 1998 Year ended
through through December 31,
December 31, May 28, --------------------------------
1998 1998 1997 1996
------------- --------------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash from operating activities
Net loss $(8,428,882) $(4,294,896) $ (6,826,019) $(20,491,318)
Adjustments to reconcile net loss to net cash
used in operating activities:
Write-off of impaired intangible assets - - - 18,584,862
Distribution of tax benefit - (2,607,000) (158,000) (3,368,000)
Depreciation and amortization 1,576,280 634,557 2,466,433 4,880,429
(Gain) loss on sale of property
and equipment 167,839 286,755 202,180 (210,554)
Changes in current assets and liabilities:
Trade accounts receivable, net 892,782 (1,334,931) (5,156,970) (105,330)
Prepaid expenses and other
current assets (207,748) 139,217 97,665 (30,856)
Other assets (221,873) (81,716) 80,777 (100,803)
Accounts payable 1,144,570 (47,515) (121,682) (155,935)
Accrued liabilities 1,628,155 (846,844) (981,867) 250,356
----------- ----------- ------------ ------------
Net cash used in operating activities (3,448,877) (8,152,373) (10,397,483) (747,149)
----------- ----------- ------------ ------------
Cash from investing activities
Purchases of property and equipment (1,428,526) (25,835) (276,205) (1,068,671)
Purchase of business, net of cash acquired (5,800,000) - - -
Proceeds from sales of property
and equipment - 89,663 498,425 1,181,159
----------- ----------- ------------ ------------
Net cash (used in) provided by
investing activities (7,228,526) 63,828 222,220 112,488
----------- ----------- ------------ ------------
Cash from financing activities
Principal borrowings on long-term debt 4,554,926 - - -
Net borrowings under revolving credit
facilities 4,977,441 - - -
Bank overdraft (634,436) 448,465 1,515,473 (1,259,674)
Debt issuance costs (90,000) - - -
Capital contribution 1,950,000 - - -
Principal payments under capital
lease obligations - (57,897) (1,053,062) (3,494,148)
Increase in due to Borg-Warner Security
Company - 8,165,281 9,539,754 5,655,294
----------- ----------- ------------ ------------
Net cash provided by financing activities 10,757,931 8,555,849 10,002,165 901,472
----------- ----------- ------------ ------------
Net increase (decrease) in cash 80,528 467,304 (173,098) 266,811
Cash, beginning of period 614,876 147,572 320,670 53,859
----------- ----------- ------------ ------------
Cash, end of period $ 695,404 $ 614,876 $ 147,572 $ 320,670
=========== =========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
Pony Express Delivery Services, Inc.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying financial statements include the accounts of Pony Express
Delivery Services, Inc. (the "Company") and, with effect from August 31, 1998,
its wholly owned subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation. See Notes 2 and 3.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents represent highly liquid investments with an original maturity
date of three months or less. Cash equivalents are carried at cost, which
approximates market value.
Property and Equipment
Property and equipment are recorded at cost. Major property additions,
replacements, and betterments are capitalized, while maintenance and repairs
which do not extend the useful lives of these assets are expensed currently.
Depreciation is provided using the straight-line method for financial reporting
and accelerated methods for income tax purposes. Straight-line depreciation is
calculated over the following estimated useful lives:
Buildings 15-30 years
Furniture and fixtures 3-10 years
Equipment 3-5 years
Vehicles 3-5 years
Leasehold improvements are capitalized and amortized over the lesser of the
expected life of the lease or the useful life of the asset.
Goodwill
Goodwill represents the excess cost over the net assets of businesses acquired
and is amortized on a straight-line basis over 20 years. The Company
periodically evaluates the recoverability of goodwill based on expectations of
nondiscounted cash flows and operating income for each entity having a material
goodwill balance.
During the year ended December 31, 1996, the Company recognized a loss due to
the impairment of value of certain intangible assets. These intangible assets,
primarily goodwill, were deemed by management to have no continuing value due to
current and projected future losses from operations generated by the Company
under then existing management. Included in the results of operations for the
year ended December 31, 1996 is approximately $18,600,000, which represents the
write-off of these intangible assets.
F-12
<PAGE>
Pony Express Delivery Services, Inc.
Notes to Consolidated Financial Statements
Income Taxes
The Company follows the practice of providing for income taxes based on
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." SFAS No. 109 requires recognition of deferred tax assets and
liabilities for the future tax consequences attributable to differences between
the financial statement carrying amount of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using the enacted statutory tax rates expected to be applied to taxable income
in the years in which those temporary differences are expected to be recovered
or settled.
Revenue Recognition
Revenue is recognized when the delivery is completed or when services are
rendered to customers.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, receivables, accounts payable
and accrued liabilities approximate fair value due to their short maturities.
Based on interest rates available to the Company, the fair value of long-term
debt, including current portion, approximates the carrying value of such debt.
Long-Lived Assets
The Company reviews the carrying values assigned to long-lived assets based on
expectations of undiscounted future cash flows and operating income generated by
the long-lived assets in determining whether the carrying amount of such assets
is recoverable. As of December 31, 1998, management has concluded that no
impairment exists on the Company's long-lived assets.
2. Organization and Basis of Presentation
The Company operates as a corporate delivery service organization that provides
same day and next day delivery services primarily to commercial and industrial
companies, hospitals and service providers throughout the United States.
As discussed further in Note 3, effective May 29, 1998, the outstanding shares
of common stock of the Company were sold by Borg-Warner Security Corporation to
Mustang Holdings, Inc. in a business combination accounted for as a purchase,
accordingly, the carrying values of the Company's assets and liabilities as well
as the Company's results of operations and cash flows for the period May 29,
1998 through December 31, 1998 are not necessarily comparable to such financial
data for periods prior to May 29, 1998.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has sustained
significant losses from operations and has used significant amounts of cash in
operations during the last three years, and, as of December 31, 1998 had working
capital and net capital deficiencies. These operating losses and cash flow
deficiencies have continued into 1999.
F-13
<PAGE>
Pony Express Delivery Services, Inc.
Notes to Consolidated Financial Statements
In view of the matters described in the preceding paragraph, there is
significant doubt about the Company's ability to continue as a going concern.
The recoverability of recorded assets and satisfaction of the liabilities is
dependent on the continued operations of the Company, which is in turn dependent
upon the Company's ability to meet its financing requirement on a continuing
basis and to succeed in its future operations. The financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue in existence.
Due to these unfavorable results of operations and cash flows, the Company is in
the process of negotiating payment terms with vendors representing a significant
portion of the accounts payable and is managing the payment of the remaining
accounts payable on a case-by-case basis. Management is also taking certain
steps to obtain additional debt and equity financing and to improve it's
operating results and financial position.
Subsequent to December 31,1998, the Company implemented a restructuring program
to reduce its operating losses and negative cash flows from operating
activities. The restructuring calls for the discontinuation of operations in the
Atlantic and Southeast regions, which represents approximately 40% of the 113
branches in operation at December 31, 1998. Total charges related to the
restructuring, which were charged against operations during 1999, amounted to
approximately $5.2 million.
To fund working capital, the Company plans to obtain additional cash from
various sources, including sales of land and buildings. In addition, on May 28,
1999, the Company's parent, Mustang Holdings, Inc. signed a definitive agreement
for the purchase of the Company's stock by Skynet Holdings, Inc. ("Skynet"), an
international delivery services company based in Los Angeles, California (Note
11). In conjunction with the close of the Skynet transaction, which occurred on
June 17, 1999, the Company anticipates an equity or debt infusion to be used for
working capital purposes.
Management estimates that proceeds contemplated by the transactions discussed
above will be sufficient to fund the Company's operations through summer 1999.
If the Company is unable to increase revenues and reduce costs in order to
generate sufficient positive cash flows beginning in summer 1999, an additional
capital infusion or additional sources of financing will be required for the
Company to meet its obligations. While the Company believes that the plans which
it is undertaking will be successful, no assurances can be given that the
Company will be successful and that the Company will continue as a going
concern.
3. Business Combinations and Subsequent Event
Prior to May 29, 1998 the Company was a wholly-owned subsidiary of Borg-Warner
Security Corporation. Effective May 29, 1998, Mustang Holdings, Inc. ("Mustang")
acquired the outstanding shares of common stock of the Company for approximately
$13,256,000 in promissory notes. See Note 2.
The acquisition was recorded under the purchase method of accounting. The
purchase price has been allocated to assets acquired and liabilities assumed
based on the fair market value at the date of acquisition as follows:
Working capital, net of cash acquired $ 4,159,000
Property and equipment 7,956,000
Goodwill 1,141,000
-----------
Purchase price, net of cash acquired $13,256,000
===========
F-14
<PAGE>
Pony Express Delivery Services, Inc.
Notes to Consolidated Financial Statements
On August 31, 1998, the Company acquired the outstanding shares of common stock
of Courier Express, Inc. ("Courier Express") for $5,800,000 in cash and
$3,600,000 in promissory notes. Courier Express is a ground delivery service
company with operations mainly based in the western United States. Funding for
the cash portion of the purchase price was provided by borrowings under the
Credit Facility. See Note 5.
The Courier Express acquisition was recorded under the purchase method of
accounting, and accordingly, results of Courier Express' operations are included
in the consolidated results of operations of the Company from the acquisition
date. The purchase price has been allocated to assets acquired and liabilities
assumed based on the fair market value at the date of acquisition, as follows:
Working capital, net of cash acquired $(3,101,000)
Property and equipment 559,000
Non-compete covenant 665,000
Goodwill 12,018,000
Long-term liabilities (741,000)
-----------
Purchase price, net of cash acquired $ 9,400,000
===========
As described in Note 11, on May 28, 1999, Mustang, the sole stockholder of the
Company, signed a definitive agreement for the purchase of the Company's stock
by Skynet. The acquisition was completed on June 17, 1999. Prior to the
acquisition, Skynet advanced $2,950,000 to the Company during 1999. The proceeds
were used to pay Company vendors and to fund operations.
4. Property and Equipment
Property and equipment consist of the following:
<TABLE>
December 31,
December 31, May 28, --------------------------------------
1998 1998 1997 1996
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Land $ 1,123,029 $ 750,424 $ 750,424 $ 750,424
Buildings and
improvements 2,283,563 2,749,408 2,749,408 2,840,286
Furniture, fixtures and
equipment 4,968,213 8,082,008 8,287,321 8,011,375
Vehicles 1,098,954 5,314,225 6,650,983 10,175,535
Construction in progress 299,856 4,500 4,500 316,443
----------- ------------ ------------ ------------
9,773,615 16,900,565 18,442,636 22,094,063
Less accumulated
depreciation (1,285,932) (11,620,765) (12,177,696) (12,938,290)
----------- ------------ ------------ ------------
$ 8,487,683 $ 5,279,800 $ 6,264,940 $ 9,155,773
=========== ============ ============ ============
</TABLE>
F-15
<PAGE>
Pony Express Delivery Services, Inc.
Notes to Consolidated Financial Statements
5. Notes Payable and Long-Term Debt
In May and October 1998, the Company and its subsidiary, respectively, entered
into loan and security agreements (the "Agreements") with a financial
institution which provide for borrowings up to $9 million under senior revolving
credit facilities (the "Credit Facilities"), subject to certain borrowing
limits, as defined in the Agreements. Amounts outstanding under the Credit
Facilities mature May 28, 2002 and bear interest at the prime rate (7.75% at
December 31, 1998) plus 1% with interest payable monthly. The Credit Facilities
specify a commitment fee of .25% per annum to be applied to the unused portion
of the Credit Facilities, payable monthly in arrears. As of December 31, 1998,
$6,884,529 had been borrowed under the Credit Facilities.
In conjunction with the Agreements, the Company was provided a term loan. The
term loan bears interest at prime rate plus 1% and is payable in 60 equal
monthly installments of $21,255 through 2003. As of December 31, 1998, the
Company owed $1,253,696 under the term loan.
Borrowings under the Agreements will be secured by substantially all of the
Company's assets, whether tangible or intangible, now owned or in existence or
thereafter acquired or arising. The Agreements set forth a number of covenants,
which among other things limit the Company's ability to, without prior written
consent, enter into a merger or any other consolidation transaction, acquire any
assets except in the ordinary course of business, incur debt, incur liens, make
investments, repurchase stock, or make dividend or other distributions.
In conjunction with the acquisition of Pony Express by Mustang, the Company
entered into two unsecured promissory note agreements. The 8% note payable due
2005 requires payments of accrued interest on each anniversary date of the note.
If for the first two years of the note, however, the sum of EBITDA less not more
than $3 million of capital expenditures, as defined, for the 12 month period
ending each March 31 (or such shorter period ending March 31, 1999) is less than
interest expense, as defined, for such period (the "Sufficiency Test"), the
amount of such interest payments will be added to the principal amount of the
note. The total amount of interest expense from May 29, 1999 to December 31,
1998 that has been added to the principal balance was approximately $303,000.
The 4% subordinated convertible note payable (the "Convertible Note") due 2007
also requires interest payments on the dates set forth above for interest
accrued for the preceding year only if the results of operations meet the
Sufficiency Test. Interest escalates to 5% on the second anniversary, 6% on the
third anniversary, and 7% on the fourth anniversary and thereafter. The
Convertible Note is convertible at any time into that number of shares of
Mustang common stock which represents 10% of the total outstanding common stock
and warrants to acquire common stock as of May 29, 1998. The conversion is
contingent upon the failure of Mustang to experience its right to prepayment of
the Convertible Note, including after delivery of a notice of conversions to
Mustang. No interest expense was recorded for the Convertible Note, as the
results of operations from the acquisition date to December 31, 1998 did not
meet the Sufficiency Test. As of December 31, 1998, the Company owed $6,803,337
under the note payable to seller and $6,755,835 under the subordinated
convertible note payable to seller.
F-16
<PAGE>
Pony Express Delivery Services, Inc.
Notes to Consolidated Financial Statements
As part of the Courier Express acquisition the Company entered into two
unsecured 8% senior subordinated debentures (the "Debentures") due 2005. The
Debentures are subordinate to the Credit Facilities, the term loan, and to any
stockholder indebtedness. Interest is payable monthly commencing October 1, 1998
and ending September 1, 2000. Commencing October 1, 2000, the principal sum will
be paid in 60 monthly installments, plus interest, with the final payment due on
September 1, 2005. The Debentures include certain covenants, which among other
things, limit Mustang's ability to, without prior consent, enter into a merger
or any other consolidation transaction, pay dividends, repurchase stock, or
allow a change in control, as defined. As of December 31, 1998, the Company owed
$3,600,000 under the Debentures.
During September 1998, Pony Express issued senior subordinated notes payable to
certain entities that serve as advisors to Mustang (the "Advisor Notes"). The
Advisor Notes, bear interest at 8%, payable quarterly, commencing on December
31, 1998, with the principal and unpaid interest due September 30, 2005. The
Advisor Notes are secured by substantially all of the Company's assets and are
subordinate to the Credit Facilities and the term loan. As of December 31, 1998,
the Company owed $3,000,000 under the Advisor Notes.
Courier Express has installment loans to various lenders that are secured by
vehicles. These loans bear interest at various fixed rates up to 15% per annum
with maturity dates through 2003. The carrying value of assets under installment
loans, which are included in property and equipment in the accompanying
balance sheet, is $323,000 at December 31, 1998.
Cash paid for interest was approximately $624,000, $206,000, $1,592,000 and
$779,000 for the periods ended December 31, 1998 and May 28, 1998 and the years
ended December 31, 1997 and 1996.
Future maturities of long-term debt, including amounts due under the Credit
Facilities, at December 31, 1998 are as follows:
Year Amount
---- -----------
1999 $ 7,236,941
2000 580,379
2001 1,318,996
2002 1,520,996
2003 2,062,296
Thereafter 15,969,172
-----------
$28,688,780
===========
6. Capitalized Lease Obligations
Capital lease obligations consist of the following:
December 31,
December 31, May 28, -------------------------
1998 1998 1997 1996
----------- ----------- ----------- -----------
Various vehicle leases $ - $ - $ 57,897 $1,110,959
Less current maturities - - 53,332 1,020,424
----------- ----------- ----------- ----------
$ - $ - $ 4,565 $ 90,535
=========== =========== =========== ==========
F-17
<PAGE>
Pony Express Delivery Services, Inc.
Notes to Consolidated Financial Statements
7. Income Taxes
<TABLE>
<CAPTION>
Significant components of the Company's deferred income tax assets and liabilities are as follows:
December 31,
December 31, May 28, ----------------------------------------
1998 1998 1997 1996
----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Deferred tax assets
Net operating loss
carryforwards $ 4,098,000 $ - $ - $ -
Allowance for bad debts 334,000 836,000 476,000 149,000
Group insurance 415,000 17,000 64,000 481,000
Other 425,000 141,000 239,000 171,000
---------------- --------------- --------------- --------------
5,272,000 994,000 779,000 801,000
Deferred tax liabilities
Excess tax depreciation and
amortization over book (4,000) (321,000) (311,000) (302,000)
---------------- --------------- --------------- --------------
Net deferred tax asset before
valuation allowance 5,268,000 673,000 468,000 499,000
Valuation allowance (5,268,000) - - -
---------------- --------------- --------------- --------------
Net deferred tax asset $ - $ 673,000 $ 468,000 $ 499,000
================ =============== =============== ==============
</TABLE>
The reconciliation of the effective income tax rate to the federal statutory tax
rate is as follows:
<TABLE>
<CAPTION>
December 31,
December 31, May 28, ---------------------------------
1998 1998 1997 1996
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
Federal statutory tax rate (34.0)% (34.0)% (34.0)% (34.0)%
Effect of net operating loss
carryforward and valuation
allowance 34.0 - - -
State income tax, net of
federal benefit - (4.0) (4.0) (4.0)
Write-off of impaired
intangible assets - - - 23.8
Other - .2 .4 .1
----------- --------- --------- ---------
Effective income tax rate -% (37.8)% (37.6)% (14.1)%
=========== ========= ========= =========
</TABLE>
During the period ended May 28, 1998 and the years ended December 31, 1997 and
1996 the Company generated income tax benefits of $2,607,000, $4,116,000 and
$3,368,000, that were retained by Borg-Warner Security Corporation, the
Company's parent during that time period. These income tax benefits were treated
as distributions by the Company.
F-18
<PAGE>
Pony Express Delivery Services, Inc.
Notes to Consolidated Financial Statements
At December 31, 1998, the Company had available for carryforward a net operating
loss of approximately $10.8 million. As result of an ownership change and in
accordance with Section 382 of the Internal Revenue Code, approximately $854,000
of the net operating loss relates to Courier Express prior to the acquisition
and is limited to approximately $470,000 for each year. Losses are limited to a
20 year carryforward, with losses expiring in 2018. Based on the Company's
current operating results, it is not likely that the Company will realize the
benefit from the deferred tax assets. As such, a 100% valuation allowance was
provided. The availability of the foregoing net operating losses will be further
limited by the transaction described in Note 11.
8. Employee Benefit Plans
Defined Benefit Plan
Pony Express offers defined benefits to employees who are not covered under the
union-sponsored, collective bargaining agreement and who do not qualify as
highly compensated employees, as defined. Substantially all of the Company's
delivery service employees are covered by collective bargaining agreements.
Participants are fully vested at the later of the age of 65 or the fifth
anniversary date of participation, and benefits are paid to eligible employees
upon retirement based primarily on years of service. Pension benefits are
provided through a plan maintained by Borg-Warner Security Corporation.
Under the Pony Express purchase agreement, all benefit obligations as of the
purchase date are payable by the seller, and Pony Express is liable to fund
benefits earned for the service period subsequent to May 28, 1998.
The funded status of the plan and the resulting accrued benefit liability are
summarized as follows at December 31, 1998:
Change in benefit obligation:
Benefit obligation at May 28, 1998 $ -
Service cost 127,853
Interest cost 5,147
Plan change 174,380
---------
Benefit obligation at December 31,
1998 (unfunded) $ 307,380
=========
The unfunded status of the plan as of December 31, 1998, consists of accrued
benefit cost of $133,000 and an additional minimum liability of $174,380 as
defined under SFAS No. 87, "Employers' Accounting for Pensions."
The weighted-average assumptions as of December 31, 1998 were as follows:
Discount rate 6.5%
Expected return of plan assets 7.5%
The components of the net periodic benefits cost for the period from May 29,
1998 to December 31, 1998, consist of service cost of $127,853 and interest
costs of $5,147.
F-19
<PAGE>
Pony Express Delivery Services, Inc.
Notes to Consolidated Financial Statements
Defined Contribution Plan
Pony Express maintains a defined contribution plan, which started during October
1997, for all employees who complete 30 days of employment and whose
compensation does not qualify as a highly compensated employee, as defined.
Employees may elect to make contributions between 1% and 10% of compensation,
subject to annual limitation under the Internal Revenue Code ("IRC"). Employer
matching contributions are made quarterly at a percentage of compensation
varying from 2% to 8%, based on age and years of service. Matching contributions
vest over a period of years, and Company contributions to this plan totaled
approximately $161,000, $153,000 and $62,000 for the periods ended December 31,
1998 and May 28, 1998 and the year ended December 31, 1997.
401(k) Savings Plan
Pony Express offers a 401(k) savings plan (the "401(k) Plan") that permits
participants to make contributions by salary reduction pursuant to Section
401(k) of the IRC. Pony Express matches 50% of employee contributions up to a
maximum of 6% of compensation for each non-bargaining unit participant of the
401(k) Plan. Employees vest immediately in their own contributions and in Pony
Express contributions after five years. In connection with the required
matching, Pony Express' contributions to the 401(k) Plan were approximately
$87,000, $40,000, $91,000 and $83,000 for the periods ended December 31, 1998
and May 28, 1998 and the years ended December 31, 1997 and 1996.
9. Commitments and Contingencies
Operating Leases
The Company leases equipment and office space under cancelable (i.e., month-to-
month terms) and noncancelable operating lease agreements that expire in various
years through 2005. Rental expenses under these leases amounted to approximately
$5,635,000, $3,109,000, $6,096,000 and $4,351,000 for the periods ended December
31, 1998 and May 28, 1998 and the years ended December 31, 1997 and 1996.
At December 31, 1998, future minimum lease payments under noncancelable
operating leases were as follows:
Year Amount
---- ------
1999 $1,649,000
2000 1,474,000
2001 770,000
2002 238,000
2003 85,000
Thereafter 110,000
----------
Total $4,326,000
==========
F-20
<PAGE>
Pony Express Delivery Services, Inc.
Notes to Consolidated Financial Statements
Consulting and Noncompete Agreement
Courier Express has entered into a consulting and covenant not to compete
agreement (the "Noncompete Agreement") with a former owner of a previously
acquired entity. The noncompete benefit, which was valued at estimated fair
value at the time of the acquisition of Courier Express by the Company, is being
amortized over the term of the agreement and is included in other assets in the
accompanying balance sheet. Based on the terms of the Noncompete Agreement,
amounts are payable as follows as of December 31, 1998:
Year Amount
---- --------
1999 $228,000
2000 120,000
2001 120,000
2002 120,000
2003 33,000
--------
$621,000
========
The long term portion of the amounts payable under the Noncompete Agreement is
included in other long-term liabilities in the accompanying balance sheet.
Litigation, Claims and Assessments
The Company is party to various legal proceedings arising in the normal course
of business, most of which involves claims for personal injury and property
damage incurred in connection with its operations. Management believes that the
outcome of its various legal proceedings will not have a material adverse effect
on the Company's financial position or results of operations.
10. Related Party
Effective May 29, 1998, the Company entered into a management advisory agreement
(the "Advisor Agreement") with advisors, the directors of which are stockholders
of the Company, to provide business and financial advice to the Company in
connection with relationships with lenders, stockholders, other third-party
associates and the expansion of the business. Under the agreement terms, the
Company shall pay advisory fees for assistance in raising equity or obtaining
debt financing. In addition, the Company shall pay an annual management fee, as
defined in the Advisor Agreement, and an investment banking fee for the
aggregate consideration paid notes issued in connection with an acquisition of
another company. Total amounts paid to the advisors for the period from May 29,
1998 to December 31, 1998 were approximately $213,000. There were no amounts
owed at December 31, 1998.
F-21
<PAGE>
Pony Express Delivery Services, Inc.
Notes to Consolidated Financial Statements
11. Subsequent Events
As discussed in Note 3, the Company signed a definitive agreement for the
purchase of the Company's stock by Skynet for an undisclosed amount. The
acquisition was completed on June 17, 1999. Prior to completing the acquisition,
Skynet provided advances to the Company amounting to $2,950,000. The proceeds
were used to pay the Company's vendors and to fund operations.
Based on the terms of the purchase agreement between the Company and the seller
of Pony Express, the Company was to be reimbursed for the sum of certain
expenses, premiums, and claims and the net unfavorable adjustments to closing
working capital, excluding accounts receivable. As of December 31, 1998, amounts
due under this agreement amounted to $946,572 and are included in the
accompanying balance sheet as due from seller. Amounts were subsequently
collected on May 4, 1999.
In January 1999, the Company adopted a plan to cease operations and close its
facilities in its Atlantic and Southeast regions. The discontinuation called for
the shutdown of approximately 40% of the 113 branches in operation and began in
March 1999.
F-22
<PAGE>
PONY EXPRESS DELIVERY SERVICE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1998* 1999
-------------- --------------
(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 695,404 $ 379,606
Receivables 12,230,237 11,963,609
Prepaid expenses and other 2,034,409 976,761
----------- ------------
Total current assets 14,960,050 13,319,976
Property and equipment, net 8,487,683 7,928,762
Intangible and other assets, net 13,963,272 13,414,560
----------- ------------
$37,411,005 $ 34,663,298
=========== ============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities
Accounts payable $ 8,600,079 $ 13,532,666
Bank debt (Note 3) 6,884,529 5,681,299
Other accrued liabilities 6,174,323 6,829,007
Current portion of long-term debt - 258,996
----------- ------------
Total current liabilities 21,658,931 26,301,968
----------- ------------
Long-term debt, net of current portion 22,230,956 22,388,912
----------- ------------
Stockholders' Equity (Deficit)
Common stock, $.10 par value, 100 shares authorized, shares
issued and outstanding - -
Additional paid-in capital 1,950,000 1,950,000
Accumulated deficit (8,428,882) (15,977,582)
----------- ------------
Total stockholders' equity (deficit) (6,478,882) (14,027,582)
----------- ------------
$37,411,005 $ 34,663,298
=========== ============
</TABLE>
* Derived from audited financial statements.
F-23
<PAGE>
PONY EXPRESS DELIVERY SERVICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------------------------
1998 1999
------------- ----------------
<S> <C> <C>
Revenues $33,684,034 $33,363,698
Cost of sales 33,455,578 34,427,120
----------- -----------
Gross profit 228,456 (1,063,422)
Selling, general and operating expenses 2,547,709 6,032,394
----------- -----------
Operating loss (2,319,253) (7,095,816)
Interest expense (88,499) (452,884)
----------- -----------
Net loss $(2,407,752) $(7,548,700)
=========== ===========
</TABLE>
F-24
<PAGE>
PONY EXPRESS DELIVERY SERVICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Increase (decrease) in cash and cash equivalents)
<TABLE>
<CAPTION>
Three months ended
March 31,
1998 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net loss $(2,407,752) $(7,548,700)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 623,420 831,775
Changes in operating assets and liabilities,
net of business acquired:
Receivables (2,584,244) 1,213,200
Prepaid expenses and other assets (101,235) 111,076
Accounts payable (861,135) 4,932,587
Accrued expenses and other liabilities (801,419) 1,541,950
----------- -----------
Net cash provided by (used in) operating activities (6,132,365) 1,081,888
----------- -----------
Cash flows from financing activities
Advances from parent company 6,483,894 -
Repayments on credit facility - (1,203,230)
Debt repayments - (194,456)
----------- -----------
Net cash provided by financing activities 6,483,894 (1,397,686)
----------- -----------
Net increase (decrease) in
cash and cash equivalents 351,529 (315,798)
Cash and cash equivalents,
beginning of period 147,572 695,404
----------- -----------
Cash and cash equivalents, end of period $ 499,101 $ 379,606
=========== ===========
</TABLE>
F-25
<PAGE>
PONY EXPRESS DELIVERY SERVICE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - General
The condensed consolidated financial statements include the accounts of
Pony Express Delivery Service, Inc. ("Pony") and its wholly-owned subsidiary.
All significant inter-company transactions and balances have been eliminated.
The accompanying unaudited condensed consolidated financial statements were
prepared on the accrual basis of accounting. In the opinion of management, all
adjustments (consisting only of normal, recurring accruals) which are necessary
for a fair presentation of the financial results for the periods presented have
been made.
Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted accounting
principles, were condensed or omitted. Accordingly, these condensed
consolidated financial statements should be read in conjunction with the audited
financial statements and notes thereto for the year ended December 31, 1998.
Note 2 - Subsequent Events
On June 17, 1999, all the outstanding shares of capital stock of Pony were
acquired by Skynet Holdings, Inc. a Delaware corporation ("Skynet"). The
consideration included 600,000 shares of the Company's Common Stock and 848,808
shares of Skynet's Series B Convertible Preferred Stock. The acquisition was
accounted for, by Skynet, using the purchase method of accounting with the
assets acquired and liabilities assumed recorded at fair values, and the results
of the acquired business will be included in our consolidated financial
statements from the closing date of the acquisition.
Based on the terms of the purchase agreement between Skynet and the seller
of Pony Express, Pony was to be reimbursed for the sum of certain expenses,
premiums, and claims and the net unfavorable adjustments to closing working
capital, excluding accounts receivable. As of December 31, 1998, amounts due
under this agreement amounted to $946,572 and are included in the accompanying
balance sheet as due from seller. Amounts were subsequently collected on May 4,
1999.
In January 1999, Pony adopted a plan to cease operations and close its
facilities in its Atlantic region. The discontinuation called for the shutdown
of approximately 40% of the 113 branches in operation and began in March 1999.
F-26
