UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
|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
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to ____________________.
Commission file number 001-16105
STONEPATH GROUP, INC.
------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 65-0867684
----------------------------------- ---------------------------------------
(State or Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1600 Market Street, Suite 1515
Philadelphia, PA 19103
------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (215) 979-8370
--------------
Indicate by check mark 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 |_|
Indicate by a check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes[ ] No [X]
There were 36,212,369 issued and outstanding shares of the registrant's common
stock, par value $.001 per share, at October 24, 2003.
STONEPATH GROUP, INC.
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2003
(Unaudited) and December 31, 2002....................................1
Consolidated Statements of Operations (Unaudited)
Three and nine months ended September 30, 2003 and
2002.................................................................2
Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, 2003 and 2002 ......................3
Notes to Unaudited Consolidated Financial Statements.................4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ......................16
Item 3. Quantitative and Qualitative Disclosures About Market Risk .........34
Item 4. Controls and Procedures.............................................34
Part II. Other Information
Item 1. Legal Proceedings ..................................................35
Item 2. Changes in Securities and Use of Proceeds ..........................35
Item 3. Defaults Upon Senior Securities ....................................36
Item 4. Submission of Matters to a Vote of Security Holders ................36
Item 5. Other Information ..................................................37
Item 6. Exhibits and Reports on Form 8-K ...................................37
SIGNATURES...................................................................39
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
STONEPATH GROUP, INC.
Condensed Consolidated Balance Sheets
September 30, December 31,
2003 2002
----------------- -------------------
Restated
(Unaudited) (See Note 2)
Assets
Current assets:
Cash and cash equivalents $ 1,126,680 $ 2,266,108
Accounts receivable, net 42,934,264 21,799,983
Other current assets 1,515,620 1,002,695
----------------- -------------------
Total current assets 45,576,564 25,068,786
Goodwill and acquired intangibles, net 34,373,863 25,353,705
Furniture and equipment, net 6,745,780 3,233,677
Other assets 1,775,943 1,509,347
----------------- -------------------
$ 88,472,150 $ 55,165,515
================= ===================
Liabilities and Stockholders' Equity
Current liabilities:
Line of credit - bank $ 17,120,869 $ -
Accounts payable 17,154,318 12,873,703
Accrued expenses 4,864,416 2,981,375
Earn-out payable - 3,879,856
Capital lease obligation, current portion 657,151 -
----------------- -------------------
Total current liabilities 39,796,754 19,734,934
Capital lease obligation, net of current portion 1,297,760 -
----------------- -----------------
Total liabilities 41,094,514 19,734,934
----------------- -----------------
Minority interest in subsidiaries 876,203 -
----------------- -----------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares
authorized;
Series D, convertible, issued and outstanding: 325,125
and 360,745 shares at 2003 and 2002, respectively
(Liquidation preference: $19,507,500) 325 361
Common stock, $.001 par value, 100,000,000 shares
authorized;
issued and outstanding: 29,989,628 and 23,453,414
shares at 2003 and 2002, respectively 29,990 23,453
Additional paid-in capital 205,030,750 196,235,064
Accumulated deficit (158,514,650) (160,711,891)
Deferred compensation (44,982) (116,406)
----------------- -------------------
Total stockholders' equity 46,501,433 35,430,581
----------------- -------------------
$ 88,472,150 $ 55,165,515
================= ===================
See accompanying notes to unaudited consolidated financial statements.
1
STONEPATH GROUP, INC.
Consolidated Statements of Operations
(Unaudited)
Three months ended September 30, Nine months ended September 30,
------------------------------- --------------------------------
2002 2002
Restated Restated
2003 (See Note 2) 2003 (See Note 2)
------------ ------------- -------------- -------------
Total revenue $ 77,343,013 $ 43,860,010 $ 177,115,389 $ 89,615,173
Cost of transportation 58,686,895 31,863,934 132,170,533 64,413,787
------------ ------------- -------------- -------------
Net revenue 18,656,118 11,996,076 44,944,856 25,201,386
Personnel costs 9,143,082 5,595,409 22,709,180 12,715,352
Other selling, general
and administrative costs 5,816,699 3,755,204 16,177,892 9,941,520
Depreciation and amortization 719,536 652,925 1,879,765 1,619,389
Litigation settlement and non-recurring
costs 428,837 - 1,178,837 -
------------ ------------- -------------- -------------
Income from operations 2,547,964 1,992,538 2,999,182 925,125
Other income (expense), net (215,391) 78,943 (131,264) 187,667
------------ ------------- -------------- -------------
Income from continuing operations
before income taxes and minority
interest 2,332,573 2,071,481 2,867,918 1,112,792
Income taxes 172,924 80,000 231,140 80,000
------------- ------------- -------------- -------------
Income from continuing operations before
minority interest 2,159,649 1,991,481 2,636,778 1,032,792
Minority interest 84,546 - 84,546 -
------------ ------------- -------------- -------------
Income from continuing operations 2,075,103 1,991,481 2,552,232 1,032,792
Loss from discontinued operations, net
of tax - - (354,991) -
------------ ------------- -------------- -------------
Net income 2,075,103 1,991,481 2,197,241 1,032,792
Preferred stock dividends, net - 16,800,036 - 15,020,148
------------ ------------- -------------- -------------
Net income attributable
to common stockholders $ 2,075,103 $ 18,791,517 $ 2,197,241 $ 16,052,940
============ ============= ============== =============
Basic earnings (loss) per common share -
Continuing operations(1) $ 0.07 $ 0.82 $ 0.09 $ 0.74
Discontinued operations - - (0.01) -
------------ ------------- -------------- -------------
Earnings per common share $ 0.07 $ 0.82 $ 0.08 $ 0.74
============ ============= ============== =============
Diluted earnings (loss) per common share -
Continuing operations $ 0.05 $ 0.07 $ 0.07 $ 0.04
Discontinued operations - (0.01) -
-
------------ ------------- -------------- -------------
Earnings per common share $ 0.05 $ 0.07 $ 0.06 $ 0.04
============ ============= ============== ============
Basic weighted average shares
outstanding 29,435,484 23,044,277 27,553,913 21,727,030
============ =========== ============= ===========
Diluted weighted average shares and
share equivalents outstanding 39,918,712 28,374,323 36,788,338 28,704,801
============ =========== ========== ==========
(1) Includes effect of preferred stock dividends in 2002.
See accompanying notes to unaudited consolidated financial statements.
2
STONEPATH GROUP, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended September 30,
----------------------------------
2002
Restated
2003 (See Note 2)
---------------- --------------
Cash flow from operating activities:
Net income $ 2,197,241 $ 1,032,792
Adjustments to reconcile net income to net cash used in operating activities:
Minority interest in net income of subsidiaries 84,546 --
Depreciation and amortization 1,879,765 1,619,389
Stock-based compensation 71,424 74,617
Issuance of common stock in litigation settlement 350,000 --
Discontinued operations - issuance of common stock to consultant 135,000 --
Loss on disposal of furniture and equipment 0 4,560
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable (17,888,785) (4,282,513)
Other assets (730,370) (127,394)
Accounts payable and accrued expenses 2,882,398 (2,471,152)
------------ ------------
Net cash used in operating activities (11,018,781) (4,149,701)
------------ ------------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired (7,741,378) (10,065,984)
Purchases of furniture and equipment (3,856,180) (1,012,024)
Loans made (130,000) (350,000)
Payment of earn-out (3,476,856) -
Discontinued operations - investing activities - 115,000
------------ ------------
Net cash used in investing activities (15,204,414) (11,313,008)
------------ ------------
Cash flows from financing activities:
Issuance of common stock in private placement, net of costs 5,632,468 -
Net proceeds from line of credit - bank 17,120,869 -
Proceeds from financing of equipment 2,049,638 -
Principal payments on capital lease (94,727) -
Proceeds from issuance of common stock upon exercise of
options and warrants 293,701 367,683
Sale of minority interest in subsidiary 81,818 -
------------ ------------
Net cash provided by financing activities 25,083,767 367,683
------------ ------------
Net decrease in cash and cash equivalents (1,139,428) (15,095,026)
Cash and cash equivalents at beginning of year 2,266,108 15,227,830
------------ ------------
Cash and cash equivalents at end of period $ 1,126,680 $ 132,804
============ ============
Supplemental disclosure of non-cash investing activities
Issuance of common stock in connection with acquisitions $ 1,912,468 $ -
Issuance of common stock in connection with payment of earn-out 443,300 -
Accrual for payment of acquisitions of net assets of G-Link to
be settled in common stock 1,516,220 -
Issuance of common stock on conversion of Series D Convertible 356 -
Preferred Stock
Transfer of equipment in satisfaction of interim financing 703,000 -
Issuance of common stock in satisfaction of liabilities 155,250 -
Private placement costs incurred in prior period 120,000 -
See accompanying notes to unaudited consolidated financial statements.
3
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
September 30, 2003
(1) Nature of Operations and Basis of Presentation
Stonepath Group, Inc. and subsidiaries (the "Company") is a non-asset based
third-party logistics services company providing supply chain solutions on a
global basis. The Company offers a full range of time-definite transportation
and distribution solutions through its Domestic Services platform, where the
Company manages and arranges the movement of raw materials, supplies, components
and finished goods for its customers. The Company offers a full range of
international logistics services including international air and ocean
transportation as well as customs house brokerage services through its
International Services platform. In addition to these core service offerings,
the Company also provides a broad range of value added supply chain management
services, including warehousing, order fulfillment and inventory management. The
Company services a customer base of manufacturers, distributors and national
retail chains.
The accompanying unaudited consolidated financial statements were prepared in
accordance with generally accepted accounting principles for interim financial
information. The Company's foreign operations are presented on a one-month lag.
Certain information and footnote disclosures normally included in financial
statements have been condensed or omitted pursuant to the rules and regulations
of the U.S. Securities and Exchange Commission (the "SEC") relating to interim
financial statements. These unaudited consolidated financial statements reflect
all adjustments, consisting only of normal recurring accruals, necessary to
present fairly the Company's financial position, operations and cash flows for
the periods indicated. While the Company believes that the disclosures presented
are adequate to make the information not misleading, these unaudited
consolidated financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K/A for the year ended December 31, 2002.
Interim operating results are not necessarily indicative of the results for a
full year because our operating results are subject to seasonal trends when
measured on a quarterly basis. Our first and second quarters are likely to be
weaker as compared with our other fiscal quarters, which we believe is
consistent with the operating results of other supply chain service providers.
(2) Restatement of Previously Reported Consolidated Financial Statements
On September 2, 2003 the Company announced that it had concluded its dialogue
with the staff of the Division of Corporation Finance of the SEC (the "Staff")
as part of a review of one of the Company's filings. The results of the
discussions with the Staff led the Company to restate its consolidated financial
statements for the quarters ended June 30, 2003 and March 31, 2003, and for the
years ended December 31, 2002 and 2001.
The restatement relates to (i) allocating more value to the customer
relationship intangible assets for the Company's acquisitions and (ii) revising
the amortization method and life used for such assets. The restatement did not
impact the amounts presented in the consolidated statements of cash flows for
net cash used in operating activities, net cash used in investing activities or
net cash provided by (used in) financing activities in any of the restated
periods, although it did impact certain non-cash components of cash flows from
operating activities. The results of the restatement included: (i) $4.9 million
being reclassified from goodwill to a customer relationship amortizable asset,
(ii) a reduction in the estimated useful life over which the asset is amortized
from 15 years to 10 years, and (iii) the use of an accelerated amortization
method.
4
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
September 30, 2003
The effects of this restatement on previously reported consolidated financial
statements for the three- and nine-month periods ended September 30, 2002 are
summarized below.
Three months ended September 30,
2002
------------------------
As
Previously As
Reported Restated
----------- ----------
Selected Statement of Operations
Data:
Depreciation and amortization $ 302,091 $ 652,925
Income from operations 2,343,372 1,992,538
Income from continuing
operations before income taxes 2,422,315 2,071,481
Income from continuing operations 2,342,315 1,991,481
Net income 2,342,315 1,991,481
Net income attributable to
common stockholders 19,142,351 18,791,517
Basic earnings per common share $ 0.83 $ 0.82
Diluted earnings per common share $ 0.08 $ 0.07
Nine months ended September 30,
2002
--------------------------------
As
Previously As
Reported Restated
----------- -----------
Selected Statement of Operations
Data:
Depreciation and amortization $ 715,835 $ 1,619,389
Income from operations 1,828,679 925,125
Income from continuing
operations before income taxes 2,016,346 1,112,792
Income from continuing operations 1,936,346 1,032,792
Net income 1,936,346 1,032,792
Net income attributable to
common stockholders 16,956,494 16,052,940
Basic earnings per common share $ 0.78 $ 0.74
Diluted earnings per common share $ 0.07 $ 0.04
Selected Statement of Cash Flows
Data:
Net income $ 1,936,346 $ 1,032,792
Depreciation and amortization 715,835 1,619,389
5
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
September 30, 2003
(3) Material Acquisitions
On June 20, 2003, the Company acquired, through its indirect wholly owned
subsidiary, Stonepath Logistics Government Services, Inc. ("SLGS"), the business
of Regroup Express LLC, a Virginia limited liability company ("Regroup") for
$3,700,000 in cash and $1,000,000 of the Company's common stock paid at closing,
plus contingent consideration of up to an additional $12,500,000 payable over a
period of five years based on the future financial performance of SLGS following
the acquisition. The members of Regroup may also be entitled to an additional
earn-out payment to the extent its pre-tax earnings exceed $17,500,000 during
the earn-out period. The Company used funds from its credit facility with
LaSalle Business Credit, Inc. for the cash payment at the closing. The business
acquired from Regroup provides time-definite domestic and international
transportation services including air and ground freight forwarding, ocean
freight forwarding, major project logistics as well as local pick up and
delivery services. The customers of the acquired business include U.S.
government agencies and contractors, select companies in the retail industry and
other commercial businesses. The acquisition, which significantly enhances the
Company's presence in the Washington, D.C. market, was accounted for as a
purchase and accordingly, the results of operations and cash flows of the
business acquired from Regroup are included in the accompanying consolidated
financial statements prospectively from the date of acquisition. The total
purchase price, including acquisition costs of $144,000, but excluding the
contingent consideration, was $4,844,000. The following table summarizes the
allocation of the purchase price, which is still preliminary pending the
finalization of the valuation of certain intangible assets, based on estimated
fair value of the assets acquired at June 20, 2003 (in thousands):
Furniture and equipment $ 50
Other intangible assets 1,513
Goodwill 3,281
------
Total assets acquired $4,844
======
On August 8, 2003, through newly formed subsidiaries, the Company acquired a 70%
interest in the Singapore and Cambodia based operations of the G-Link Group
("G-Link"), a regional logistics business headquartered in Singapore with
offices throughout Southeast Asia. As consideration for the purchase, the
Company paid $3,704,000 at closing through a combination of $2,792,000 in cash,
which was provided from funds available under its credit facility, and $912,000
of the Company's common stock and agreed to issue to G-Link a thirty percent
interest in the newly formed subsidiaries which acquired the operations. As
additional purchase price, on a post-closing basis, the Company has agreed to
pay G-Link for 70% of its excess net assets estimated at $1,516,000 through the
issuance of additional common stock of the Company. G-Link will also be entitled
to an earn-out arrangement over a period of four years of up to $2,500,000
contingent upon the future financial performance of the business. The
acquisition was accounted for as a purchase and accordingly, the results of
operations and cash flows of G-Link are reflected in the Company's consolidated
financial statements for periods subsequent to the date of the transaction. The
6
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
September 30, 2003
G-Link acquisition facilitates the Company's expansion into a rapidly growing
region where most of the Company's customers have significant supplier
relationships. The total purchase price, including acquisition costs of
$469,000, but excluding the contingent consideration, was $5,689,000. The
following table summarizes the allocation of the purchase price, which is still
preliminary pending the finalization of the valuation of certain intangible
assets, based on estimated fair values of the assets acquired and liabilities
assumed at August 8, 2003 (in thousands):
Current assets $ 4,095
Furniture and equipment 81
Other intangible assets 1,770
Goodwill 2,263
-------
Total assets acquired 8,209
Current liabilities assumed (1,810)
Minority interest (710)
-------
Net assets acquired $ 5,689
=======
The following unaudited pro forma information is presented as if the
acquisitions of Regroup and G-Link had occurred on January 1, 2002:
Three months ended Nine months ended
September 30, September 30,
-------------------- -------------------
2003 2002 2003 2002
------- ------- -------- --------
Revenue $79,616 $52,214 $197,350 $108,873
Income from continuing
operations 1,956 2,375 3,261 1,675
Net income 1,956 2,375 2,906 1,675
Earnings per share:
Basic $ 0.06 $ 0.10 $ 0.10 $ 0.07
Diluted $ 0.05 $ 0.08 $ 0.08 $ 0.06
(4) Stock-Based Compensation
In December 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amended the disclosure
requirements of SFAS No. 123, "Accounting and Disclosure of Stock-Based
Compensation" to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
accounts for its employee stock option grants by applying the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations.
7
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
September 30, 2003
The table below illustrates the effect on net income attributable to common
stockholders and earnings per common share as if the fair value of options
granted had been recognized as compensation expense in accordance with the
provisions of SFAS No. 123.
Three months ended September 30, Nine months ended September 30,
--------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------- -------------- -----------
Net income attributable to common stockholders:
As reported $ 2,075,103 $ 18,791,517 $ 2,197,241 $16,052,940
Add: stock-based employee compensation expense
included in reported net income 22,618 24,246 67,853 72,528
Deduct: total stock-based compensation expense
determined under fair value method for all
awards 384,639 600,098 1,566,863 997,455
------------ ------------- -------------- -----------
Pro forma net income attributable to
common stockholders $ 1,713,082 $ 18,215,665 $ 698,231 $15,128,013
============ ============= ============== ===========
Basic earnings per common share:
As reported $ 0.07 $ 0.82 $ 0.08 $ 0.74
Pro forma 0.06 0.79 0.03 0.70
Diluted earnings per common share:
As reported $ 0.05 $ 0.07 $ 0.06 $ 0.04
Pro forma 0.05 0.05 0.02 -
(5) Revolving Credit Facility
We have a $20,000,000 revolving credit facility (the "Facility") collateralized
by accounts receivable and other assets of the Company and its subsidiaries. The
Facility was increased in September 2003 from $15,000,000 to provide for
additional flexibility for the Company's acquisition strategy and on-going
working capital requirements. The Facility requires the Company and its
subsidiaries to meet certain financial objectives and maintain certain financial
covenants. Advances under the Facility may be used to finance future
acquisitions, capital expenditures or for other corporate purposes. We expect
that the cash flow from operations of our subsidiaries will be sufficient to
support the corporate overhead of the Company and some portion of the contingent
earn-out payments and other cash requirements associated with our acquisitions.
Therefore, we anticipate that our primary use of the Facility will be to finance
the cost of new acquisitions and to pay any portion of existing earn-out
arrangements that cash flow from operations is otherwise unable to fund.
Interest expense for the three- and nine-month periods ended September 30, 2003
amounted to $126,000 and $130,000, respectively. The Company did not incur any
interest expense in the comparable prior year periods.
8
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
September 30, 2003
At September 30, 2003, based on available collateral and outstanding letter of
credit commitments and excluding approximately $5,500,000 in outstanding checks,
there was $7,729,000 available for borrowing under the Facility.
(6) Commitments and Contingencies
On May 6, 2003, we settled litigation instituted on August 20, 2000 by Austost
Anstalt Schaan, Balmore Funds, S.A. and Amro International, S.A. Although we
believed that the plaintiffs' claims were without merit, we chose to settle the
matter in order to avoid future litigation costs and to mitigate the diversion
of management's attention from operations. The total settlement costs of
$750,000, paid $400,000 in cash and $350,000 in shares of the Company's common
stock, are included in the accompanying unaudited consolidated statement of
operations for the nine-months ended September 30, 2003.
On October 12, 2000, Emergent Capital Investment Management, LLC ("Emergent")
filed suit against the Company and two of its officers contending that it was
misled by statements made by the defendants in connection with the offering of
the Company's Series C Preferred Stock which closed in March 2000. Specifically,
Emergent alleges that it is entitled to rescind the transaction because it was
allegedly represented that the size of the offering would be $20,000,000 and the
Company actually raised $50,000,000. Emergent seeks a return of its $2,000,000
purchase price of Series C shares. In June of 2001, the Company moved for
summary judgment in this case.
After the summary judgment motion was filed, Emergent filed a second action
against the Company and two of its officers alleging different allegations of
fraud in connection with the Series C offering. In the new complaint, Emergent
alleges that oral statements and written promotional materials distributed by
the Company at a meeting in connection with the Series C offering were
materially inaccurate with respect to the Company's investment in Net Value,
Inc., a wholly owned subsidiary of the Company. Emergent also contends that the
defendants failed to disclose certain allegedly material transactions in which
an officer was involved prior to his affiliation with the Company. The Company
filed a motion to dismiss this new action for failure to state a claim upon
which relief can be granted.
On October 2, 2001, the Court entered an order granting summary judgment to the
defendants in the first case filed by Emergent and dismissing Emergent's second
complaint for failure to state a claim upon which relief can be granted. The
Court allowed Emergent 20 days to file a second amended complaint as to the
second action only. On October 21, 2001, Emergent did file a second amended
complaint in the second action. The second amended complaint did not raise any
new factual allegations regarding Emergent's participation in the offering.
The Company filed a motion to dismiss Emergent's second amended complaint. On
April 15, 2002, the United States District Court for the Southern District of
New York entered an order granting the motion to dismiss Emergent's second
amended complaint against the
9
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
September 30, 2003
Company and its former officers. The Court refused to grant Emergent an
additional opportunity to re-plead its claims against the defendants and a final
order dismissing the matter has been entered. Emergent thereafter filed a notice
of appeal to the United States Court of Appeals for the Second Circuit. On
September 4, 2003, the Second Circuit Court of Appeals entered an opinion
affirming in part and reversing in part the District Court's order of dismissal
with prejudice. As a result, the Second Circuit remanded the case back to the
District Court for further proceedings. The Second Circuit upheld the dismissal
of some of Emergent's claims and determined that Emergent had stated a claim in
its complaint with respect to the remainder of the claims. The Court of Appeals
also clarified some of the legal standards applicable to Emergent's remaining
claims. The Company believes that it has substantial defenses to Emergent's
claims and intends to vigorously defend this action on remand to the District
Court.
One of the Company's customers which is the subject of a Chapter 11 proceeding
under the Bankruptcy Code paid to the Company approximately $1,300,000 of
pre-petition indebtedness for shipping and delivery charges pursuant to an order
of a United States Bankruptcy Court authorizing the payment of such charges. One
of the creditors in the Chapter 11 proceeding appealed other orders of the
Bankruptcy Court authorizing the payment of pre-petition indebtedness to other
creditors for other charges, and those orders have been reversed by a United
States District Court. The Company's customer has appealed the District Court's
reversal and that appeal is pending. While no action has been taken in the
Bankruptcy Court to challenge the payments made to the Company, if such action
were taken in the future and that action were successful, the Company could be
required to return all or a substantial portion of the payments made by the
customer.
The Company may become involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse effect on
the Company's consolidated financial position, results of operations or
liquidity. As of September 30, 2003, the Company has not established any
accruals for any pending legal proceedings.
A significant customer of Regroup has, according to public statements, recently
defaulted upon its secured lending arrangements and has publicly threatened
bankruptcy proceedings. To the extent this customer enters bankruptcy, the
Company could incur possible earnings charges for some portion or all of its
outstanding receivables from this customer, which as of November 10, 2003
approximated $1,000,000. It is currently premature to speculate on the actions
that may be taken by this customer, and the impact those actions may have on the
Company. The Company remains actively engaged with the management of this
customer to monitor the situation. The cash flow impact of any such charges,
however, may be mitigated under the Company's earn-out arrangements with the
members of Regroup.
The Company entered into a master lease agreement with LaSalle National Leasing
Corporation effective June 6, 2003 to provide up to $2,800,000 in financing for
the deployment of the Tech-Logis(TM) operating system and the unrelated
installation of sorting
10
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
September 30, 2003
equipment to automate the operations of one of the Company's strategic logistics
centers. As part of this arrangement, the Company entered into an interim
financing agreement which enabled the Company to finance its purchase of the
assets discussed above while the costs of the lease arrangement were being
accumulated. On July 28, 2003, as contemplated in the master lease and related
interim financing agreements with LaSalle National Leasing Corporation effective
June 6, 2003, the Company sold and leased back the technology and sorting
equipment, which effectively retired the related interim financing arrangements,
and commenced the base term of a three-year capital lease for the technology
equipment totaling $2,050,000 and commenced the base term of a three-year
operating lease for the sorting equipment. Payments under the capital and
operating leases will be approximately $62,000 and $22,000 per month,
respectively.
(7) Stockholders' Equity
Common Stock
On March 6, 2003, the Company completed a private placement of 4,470,000 shares
of its common stock. The transaction consisted of the sale of 4,270,000 shares
at $1.35 per share and 200,000 shares at $1.54 per share. In connection with
this transaction, the Company realized gross proceeds of $6,072,500, paid a
brokerage fee of $364,350, issued placement agent warrants to purchase 297,000
shares of common stock at an exercise price of $1.49 per share, and incurred
other expenses of $75,682. In addition, the Company had previously paid the
placement agent $25,000 in cash and had issued it warrants to purchase 150,000
shares of common stock at an exercise price of $1.23 per share.
In connection with the private placement, the Company agreed to register the
shares underlying the warrants, as well as the shares that were actually issued.
Until the matter under discussion with the SEC was resolved (see Note 2), the
registration statement that was filed could not be declared effective. Under the
terms of the private placement agreement, the Company was required to pay a
penalty of $150,000 to the investors as of July 3, 2003 and at the end of each
30-day period thereafter, until the registration statement was declared
effective, which occurred on August 29, 2003. The penalty amount of $313,000 is
included in the litigation settlement and non-recurring costs line item in the
accompanying unaudited consolidated statements of operations for the three- and
nine-month periods ended September 30, 2003.
Series C Preferred Stock
In March 2000, the Company completed a private placement transaction in which it
issued 4,166,667 shares of its Series C Preferred Stock and warrants to purchase
416,667 shares of its common stock for aggregate gross proceeds of $50,000,000.
11
The terms of the Series C Preferred Stock initially required the Company to use
the proceeds from this offering solely for investments in early stage Internet
companies. In February 2001, the Company received consents from the holders of
more than two-thirds of its issued and outstanding shares of Series C Preferred
Stock to modify this restriction to permit it to use the proceeds to make any
investments in the ordinary course of business, as from time-to-time determined
by the Board of Directors, or for any other business purpose approved by the
Board of Directors.
In exchange for these consents, the Company agreed to a private exchange
transaction (the "Exchange Transaction") in which it would issue to the holders
of the Series C Preferred Stock as of July 18, 2002 (the "conversion date"),
additional warrants to purchase up to a maximum of 2,692,194 shares of its
common stock at an exercise price of $1.00 per share, and reduce the per share
exercise price from $26.58 to $1.00 for 307,806 existing warrants owned by the
holders of the Series C Preferred Stock. As a condition to receiving the
additional warrants and having their existing warrants re-priced, the holders of
the Series C Preferred Stock agreed to convert their shares of preferred stock
into shares of the Company's common stock on the conversion date.
At the request of the largest holder of Series C Preferred Stock (because of
legal limitations in its governing instruments which prevent it from holding
investments in common stock), the Company expanded the Exchange Transaction to
include an additional alternative. Holders of the Series C Preferred Stock as of
the conversion date were provided with the alternative of exchanging the common
stock issuable upon conversion of the Series C Preferred Stock, the additional
warrants and re-priced warrants, for shares of a newly designated Series D
Convertible Preferred Stock.
As a result of the exercise of these rights by the holders of the Series C
Preferred Stock, as of July 19, 2002, all of the Company's shares of Series C
Preferred Stock, representing approximately $44,600,000 in liquidation
preferences, together with warrants to purchase 149,457 shares of the Company's
common stock, were surrendered and retired in exchange for a combination of
securities consisting of:
o 1,911,071 shares of the Company's common stock;
o 1,543,413 warrants to purchase the Company's common stock at an exercise
price of $1.00; and
o 360,745 shares of the Company's Series D Convertible Preferred Stock.
The Series C Preferred Stock, which was converted into Series D Convertible
Preferred Stock, had a carrying value of approximately $21,645,000. The Company
obtained an independent appraisal which valued the Series D Convertible
Preferred Stock at approximately $4,672,000. The excess of the carrying value of
the Series C Preferred Stock over the fair value of the Series D Convertible
Preferred Stock was added to net income for purposes of computing net income
attributable to common stockholders for the three- and nine-month periods ended
September 30, 2002. The Exchange Transaction had no effect on the cash flows of
the Company.
12
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
September 30, 2003
The holders of the Series C Preferred Stock earned 162,741 additional shares of
Series C Preferred Stock from payment of preferred stock dividends during the
nine months ended September 30, 2002. No further preferred stock dividends were
payable on the Series C Preferred Stock after July 18, 2002.
Series D Convertible Preferred Stock
The outstanding Series D Convertible Preferred Stock is convertible into
3,251,250 shares of the Company's common stock as of September 30, 2003. In the
event of any liquidation, dissolution or winding-up of the Company prior to
December 31, 2003 (which also includes certain mergers, consolidations and asset
sale transactions), holders of the Series D Convertible Preferred Stock are
entitled to a liquidation preference equal to $60.00 per share, paid prior to
and in preference to any payment made or set aside for holders of the Company's
common stock, but subordinate and subject in preference to the prior payment in
full of all amounts to which holders of other classes of the Company's preferred
stock may be entitled to receive as a result of such liquidation, dissolution or
winding-up. Subsequent to December 31, 2003, the holders of the Series D
Convertible Preferred Stock are entitled to participate in all liquidation
distributions made to the holders of the Company's common stock on an as-if
converted basis. The Series D Convertible Preferred Stock carries no dividend,
and, except under limited circumstances, has no voting rights except as required
by law. In addition, the remaining Series D Convertible Preferred Stock will
convert into 3,251,250 shares of the Company's common stock no later than
December 31, 2004.
Stock Options and Warrants
The Company issued the following options and warrants during the first nine
months of 2003:
Issued to Amount Exercise price
Directors, officers and 1,739,100 $1.53 - $2.24
employees
Non-employees 297,000 $1.49
During the nine months ended September 30, 2003, options on 313,200 shares
expired. The weighted average exercise price for those options was $8.26 per
share. During the nine months ended September 30, 2003, options on 152,916
shares were exercised. The weighted average exercise price for those options was
$1.07.
During the nine months ended September 30, 2003, warrants on 437,970 shares
expired. The weighted average exercise price for those warrants was $11.12 per
share. Non-employees exercised warrants for the purchase of 149,223 of the
Company's common stock. The Company canceled warrants to purchase 147,563 shares
of its common stock in connection with a cashless exercise by the holder.
13
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
September 30, 2003
(8) Earnings (Loss) per Share
Basic earnings (loss) per common share and diluted earnings (loss) per common
share are presented in accordance with SFAS No. 128, "Earnings per Share." Basic
earnings (loss) per common share has been computed using the weighted-average
number of shares of common stock outstanding during the period. Diluted earnings
(loss) per common share incorporates the incremental shares issuable upon the
assumed exercise of stock options and warrants and upon the assumed conversion
of the Company's preferred stock, if dilutive. Certain stock options, stock
warrants, and convertible securities were excluded from the calculation of
diluted earnings (loss) per share because their effect was antidilutive. The
number of such shares excluded from the diluted earnings (loss) per common share
calculations were as follows:
Period ended: 2003 2002
---- ----
March 31 13,230,593 13,892,061
June 30 288,600 12,848,242
September 30 229,600 5,084,796
(9) Segment Information
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," established standards for reporting information about operating
segments in financial statements. Operating segments are defined as components
of an enterprise engaging in business activities about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. The Company determined that it had one operating segment in the
first quarter of 2002, Domestic Services platform, which provides a full range
of logistics and transportation services throughout North America. In the second
quarter of 2002, with the acquisition of Stonepath Logistics International
Services, Inc. ("SLIS") (f/k/a Global Transportation Services, Inc.), the
Company established its International Services platform, which provides
international air and ocean logistics services. The Company identifies operating
segments based on the principal service provided by the business unit. Each
segment has a separate management structure. The accounting policies of the
reportable segments are the same as described in the Company's Annual Report on
Form 10-K/A for the year ended December 31, 2002. Segment information, in which
corporate expenses (other than the legal settlement and non-recurring costs)
have been fully allocated to the operating segments, is as follows (in
thousands):
14
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
September 30, 2003
Three months ended September 30, 2003
--------------------------------------------------------------
Domestic International
Services Services Corporate Total
------------ -------------- ----------- ----------
Revenue from external customers $ 39,907 $ 37,436 $ - $ 77,343
Intersegment revenue 7 41 - 48
Income (loss) from operations 370 2,607 (429) 2,548
Three months ended September 30, 2002
---------------------------------------------------------------
Domestic International
Services Services Total
(Restated) (Restated) Corporate (Restated)
----------- -------------- ------------ -----------
Revenue from external customers $ 21,616 $ 22,244 $ - $ 43,860
Intersegment revenue - - -
Income (loss) from operations 1,080 912 - 1,992
Nine months ended September 30, 2003
--------------------------------------------------------------
Domestic International
Services Services Corporate Total
------------ --------------- ------------ ----------
Revenue from external customers $ 87,742 $ 89,373 $ - $ 177,115
Intersegment revenue 47 98 - 145
Income (loss) from operations 465 3,713 (1,179) 2,999
Assets 49,039 29,005 10,428 88,472
Goodwill and acquired intangibles, net 23,811 10,563 - 37,374
Nine months ended September 30, 2002
---------------------------------------------------------------
Domestic International
Services Services Total
(Restated) (Restated) Corporate (Restated)
----------- -------------- ------------ -----------
Revenue from external customers $ 50,933 $ 38,682 $ - $ 89,615
Intersegment revenue - - - -
Income (loss) from operations (29) 954 - 925
Assets 33,720 11,631 904 46,255
Goodwill and acquired intangibles, net 16,698 4,779 - 21,477
15
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
September 30, 2003
The revenue in the table below is allocated to geographic areas based upon the
location of the customer (in thousands):
Three months ended September 30, Nine months ended September 30,
------------------------------- -----------------------------
2003 2002 2003 2002
------------ --------------- ------------ -------------
Total revenue:
United States 75,891 $ 43,860 $ 174,660 $ $ 89,615
Asia 1,452 - 2,455 -
------------ --------------- ------------ -------------
Total 77,343 $ 43,860 $ 177,115 $ $ 89,615
============ =============== ============ =============
(10) Discontinued Operations
In the second quarter of 2003, the subtenant in a property previously used in
the Company's former internet business vacated the property and attempted to
terminate the sublease agreement. Shortly thereafter, the subtenant filed for
bankruptcy. Due to an inability to find a replacement subtenant, the Company
accrued the remaining lease liability amounting to approximately $227,000, net
of taxes, and such amount has been reflected as part of discontinued operations
in the accompanying consolidated statement of operations for the nine-month
period ended September 30, 2003.
In the second quarter of 2003, a consultant to the Company's former internet
business demanded payment for services provided in 2000. Based on negotiations
with the consultant, the Company agreed to issue 50,000 shares of its common
stock in satisfaction of the claim, which amounted to approximately $128,000,
net of taxes. Such amount has been reflected as part of discontinued operations
in the accompanying consolidated statement of operations for the nine-month
period ended September 30, 2003.
(11) Subsequent Events
On October 7, 2003, the Company entered into a definitive agreement to acquire a
70% interest in Hong Kong-based East Ocean Logistics Limited ("East Ocean").
East Ocean provides a full range of international logistics services, including
air and ocean transportation. East Ocean is expected to report revenues in
excess of $7,000,000 for 2003. The transaction is valued at up to $2,625,000,
consisting of cash of $700,000 and stock of $350,000 at closing, and a five-year
earn-out arrangement based upon the future financial performance of East Ocean.
As additional purchase price, on a post-closing basis the Company has agreed to
pay East Ocean for its closing date working capital, to the extent it exceeds
its average balance during the prior year. The transaction is expected to close
within 30-60 days, subject to certain closing conditions including completion of
due diligence and securing of regulatory and other third-party approvals.
On October 16, 2003, the Company completed the private placement of 5,983,500
shares of its common stock at a price of $2.20 per share. In connection with
this transaction, the Company realized gross proceeds of $13,163,700 and paid a
brokerage fee of four (4%) percent, or $527,000. The Company has registered the
shares issued in this private placement.
On November 10, 2003, the Company entered into a definitive agreement to acquire
a 55% interest in Shanghai-based Shaanxi Sunshine Express Int'l Co., Ltd.
("Shaanxi"). Shaanxi provides a wide-range of customized transportation and
logistics services and supply chain solutions including global freight
forwarding, warehousing and distribution, shipping services and special freight
handling. Shaanxi reported revenues in excess of $50,000,000 for 2002. The
transaction is valued at up to $11,000,000, consisting of cash of $3,500,000 and
stock of $2,000,000 at closing, and a five-year earn-out arrangement based upon
the future financial performance of Shaanxi. As additional purchase price, on a
post closing basis the Company has agreed to pay Shaanxi for its closing date
working capital. The transaction is expected to close within 60-90 days, subject
to certain closing conditions including completion of audited financial
statements and securing of regulatory and other third-party approvals.
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Cautionary Statement For Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, regarding future
results, levels of activity, events, trends or plans. We have based these
forward-looking statements on our current expectations and projections about
such future results, levels of activity, events, trends or plans. These
forward-looking statements are not guarantees and are subject to known and
unknown risks, uncertainties and assumptions about us that may cause our actual
results, levels of activity, events, trends or plans to be materially different
from any future results, levels of activity, events, trends or plans expressed
or implied by such forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as "may", "will", "should",
"could", "would", "expect", "plan", "anticipate", "believe", "estimate",
"continue", or the negative of such terms or other similar expressions. While it
is impossible to identify all of the factors that may cause our actual results,
levels of activity, events, trends or plans to differ materially from those set
forth in such forward-looking statements, such factors include the inherent
risks associated with: (i) our ability to sustain an annual growth rate in
revenue consistent with recent results, (ii) our ability to maintain current
operating margins, (iii) our ability to identify, acquire, integrate and manage
additional businesses in a manner which does not dilute our earnings per share,
(iv) our ability to obtain the additional capital necessary to make additional
cash acquisitions, (v) the uncertainty of future trading prices of our common
stock and the impact such trading prices may have upon our ability to utilize
common stock to facilitate our acquisition strategy, (vi) the uncertain effect
on the future trading price of our common stock associated with the dilution
upon the conversion of outstanding convertible securities or exercise of
outstanding options and warrants, (vii) our dependence on certain large
customers, (viii) our dependence upon certain key personnel, (ix) an unexpected
adverse result in any legal proceeding, (x) the scarcity and competition for the
operating companies we need to acquire to implement our business strategy, (xi)
competition in the freight forwarding, logistics and supply chain management
industry, (xii) the impact of current and future laws affecting the Company's
operations, (xiii) adverse changes in general economic conditions as well as
economic conditions affecting the specific industries and customers we serve,
(xiv) regional disruptions in transportation, and (xv) other factors which are
or may be identified from time to time in this Report or our other Securities
and Exchange Commission filings and other public announcements, including our
Annual Report on Form 10-K/A for the year ended December 31, 2002. There can be
no assurance that these and other factors will not affect the accuracy of such
forward-looking statements. Readers are cautioned not to place undue reliance on
forward-looking statements, which speak only as of the date made. We undertake
no obligation to publicly release the result of any revision of these
forward-looking statements to reflect events or circumstances after the date
they are made or to reflect the occurrence of unanticipated events.
Overview
We are a non-asset based third-party logistics services company
providing supply chain solutions on a global basis. We offer a full range of
time-definite transportation and distribution solutions through our Domestic
17
Services platform, where we manage and arrange the movement of raw materials,
supplies, components and finished goods for our customers. We also offer a full
range of international logistics services, including international air and ocean
transportation as well as customs house brokerage services, through our
International Services platform. In addition to these core service offerings, we
provide a broad range of value added supply chain management services, including
warehousing, order fulfillment and inventory management solutions. We service a
customer base of manufacturers, distributors, national retail chains and
government agencies through a network of offices in 21 major metropolitan areas
in North America, plus four international locations, using an extensive network
of over 200 independent carriers and over 150 service partners strategically
located around the world.
As a non-asset based provider of third-party logistics services, we
seek to limit our investment in equipment, facilities and working capital
through contracts and preferred provider arrangements with various
transportation providers who generally provide us with favorable rates, minimum
service levels, capacity assurances and priority handling status. The volume of
our flow of freight enables us to negotiate attractive pricing with our
transportation providers.
Our strategic objective is to build a leading global logistics services
organization that integrates established operating businesses and innovative
technologies. We plan to achieve this objective by broadening our network
through a combination of synergistic acquisitions and the organic expansion of
our existing base of operations. We are currently pursuing an aggressive
acquisition strategy to enhance our position in our current markets and to
acquire operations in new markets. The focus of this strategy is on acquiring
businesses that have demonstrated historic levels of profitability, have a
proven record of delivering high quality services, have a customer base of large
and mid-sized companies and which otherwise may benefit from our long term
growth strategy and status as a public company.
Our strategy has been designed to take advantage of shifting market
dynamics. The third party logistics industry continues to grow as an increasing
number of businesses outsource their logistics functions to more cost
effectively manage and extract value from their supply chains. Also, we believe
the industry is positioned for further consolidation as it remains highly
fragmented, and as customers are demanding the types of sophisticated and
broad-reaching service offerings that can more effectively be handled by larger,
more diverse organizations. As a non-asset based provider of third party
logistics services, we can focus on optimizing the transportation solution for
our customers, rather than on our own asset utilization. Our non-asset based
approach allows us to maintain a high level of operating flexibility and
leverage a cost structure that is highly variable in nature.
Our acquisition strategy relies upon two primary factors: first, our
ability to identify and acquire target businesses that fit within our general
acquisition criteria and, second, the continued availability of capital and
financing resources sufficient to complete these acquisitions. Our growth
strategy relies upon a number of factors, including our ability to efficiently
integrate the businesses of the companies we acquire, generate the anticipated
economies of scale from the integration, and maintain the historic sales growth
of the acquired businesses so as to generate continued organic growth. There are
a variety of risks associated with our ability to achieve our strategic
objectives, including our ability to acquire and profitably manage additional
businesses, our current reliance on a small number of key customers, the risks
inherent in international operations, and the intense competition in our
industry for customers and for the acquisition of additional businesses. The
business risks associated with these factors are identified or referred to above
under our "Cautionary Statement for Forward-Looking Statements."
18
Our principal source of income is derived from freight forwarding
services. As a freight forwarder, we arrange for the shipment of our customers'
freight from point of origin to point of destination. Generally, we quote our
customers a turn key cost for the movement of their freight. Our price quote
will often depend upon the customer's time-definite needs (first day through
fifth day delivery), special handling needs (heavy equipment, delicate items,
environmentally sensitive goods, electronic components, etc.) and the means of
transport (truck, air, ocean or rail). In turn, we assume the responsibility for
arranging and paying for the underlying means of transportation.
We also provide a range of other services including customs brokerage,
warehousing and other services, which include customized distribution,
fulfillment, and other value added supply chain services.
Total revenue represents the total dollar value of services we sell to
our customers. Our cost of transportation includes direct costs of
transportation, including motor carrier, air, ocean and rail services. We act
principally as the service provider to add value in the execution and
procurement of these services to our customers. Our net transportation revenue
(gross transportation revenue less the direct cost of transportation) is the
primary indicator of our ability to source, add value and resell services
provided by third parties, and is considered by management to be a key
performance measure. We believe that net revenue is also an important measure of
economic performance. Net revenue includes transportation revenue and our
fee-based activities, after giving effect to the cost of transportation. In
addition, management believes measuring its operating costs as a function of net
revenue provides a useful metric, as our ability to control costs as a function
of net revenue directly impacts operating earnings. With respect to our services
other than freight transportation, net revenue is identical to total revenue.
Our operating results will be affected as acquisitions occur. Since all
acquisitions are made using the purchase method of accounting for business
combinations, our financial statements will only include the results of
operations and cash flows of acquired companies for periods subsequent to the
date of acquisition.
Our GAAP based net income will also be affected by non-cash charges
relating to the amortization of customer relationship intangible assets and
other intangible assets arising from our completed acquisitions. Under
applicable accounting standards, purchasers are required to allocate the total
consideration in a business combination to the identified assets acquired and
liabilities assumed based on their fair values at the time of acquisition. The
excess of the consideration paid over the fair value of the identifiable net
assets acquired is to be allocated to goodwill, which is tested at least
annually for impairment. Applicable accounting standards require the Company to
separately account for and value certain identifiable intangible assets based on
the unique facts and circumstances of each acquisition. As a result of the
Company's acquisition strategy, our net income will include material non-cash
charges relating to the amortization of customer relationship intangible assets
and other intangible assets acquired in our acquisitions. Although these charges
may increase as the Company completes more acquisitions, we believe we are
actually growing the value of our acquired customer relationships. Thus, we
believe that earnings before interest, taxes, depreciation and amortization, or
EBITDA, is a useful financial measure for investors because it eliminates the
effect of these non-cash costs and provides an important metric of the economic
reality of the business. Accordingly, we employ EBITDA as a measure of our
historical financial performance and as a benchmark for future guidance.
19
Our operating results are also subject to seasonal trends when measured
on a quarterly basis. Our first and second quarters are likely to be weaker as
compared with our other fiscal quarters, which we believe is consistent with the
operating results of other supply chain service providers. This trend is
dependent on numerous factors, including the markets in which we operate,
holiday seasons, consumer demand and economic conditions. Since our revenue is
largely derived from customers whose shipments are dependent upon consumer
demand and just-in-time production schedules, the timing of our revenue is often
beyond our control. Factors such as shifting demand for retail goods and/or
manufacturing production delays could unexpectedly affect the timing of our
revenue. As we increase the scale of our operations, seasonal trends in one area
may be offset to an extent by opposite trends in another area. We cannot
accurately predict the timing of these factors, nor can we accurately estimate
the impact of any particular factor, and thus we can give no assurance that
historical seasonal patterns will continue in future periods.
A significant portion of our revenues is derived from our international
operations, and the growth of those operations is an important part of our
business strategy. Our current international operations are focused on the
shipment of goods into and out of the United States and are dependent on the
volume of international trade with the United States. Our strategic plan
contemplates the growth of those operations, as well as the expansion into the
transportation of goods wholly outside of the United States. The following
factors could adversely affect our current international operations, as well as
the growth of those operations:
- the political and economic systems in certain international
markets are less stable than in the United States;
- wars, civil unrest, acts of terrorism and other conflicts
exist in certain international markets;
- export restrictions, tariffs, licenses and other trade
barriers can adversely affect the international trade serviced
by our international operations;
- managing distant operations with different local market
conditions and practices is more difficult than managing
domestic operations;
- differing technology standards in other countries present
difficulties and expense in integrating our services across
international markets;
- complex foreign laws and treaties can adversely affect our
ability to compete; and
- our ability to repatriate funds may be limited by foreign
exchange controls.
20
Critical Accounting Policies
Our accounting policies, which we believe are in compliance with
accounting principles generally accepted in the United States, require us to
apply methodologies, estimates and judgments that have a significant impact on
the results we report in our financial statements. In our Annual Report on Form
10-K/A for the year ended December 31, 2002 we have discussed those policies
that we believe are critical and require the use of complex judgment in their
application. Since the date of that Form 10-K/A, there have been no material
changes to our critical accounting policies or the methodologies or assumptions
applied under them.
Results of Operations
Quarter ended September 30, 2003 compared to quarter ended September
30, 2002
The following table compares our historical total revenue, net
transportation revenue and other revenue (in thousands):
Quarter ended September 30,
------------------------------------------------
2003 2002 Percent
Change
------------- ------------ --------------
Total revenue $77,343 $43,860 76.3%
============= ============
Transportation revenue $72,073 $40,513 77.9%
Cost of transportation 58,687 31,864 84.2%
------------- ------------
Net transportation revenue
13,386 8,649 54.8%
Net transportation margins 18.6% 21.3%
Customs brokerage 3,252 2,204 47.6%
Warehousing and other
value added services 2,018 1,143 76.5%
------------- ------------
Total net revenue $18,656 $11,996 55.5%
============= ============
Total revenue was $77.3 million in the third quarter of 2003, an
increase of $33.5 million or 76.3% over total revenue of $43.9 million in the
third quarter of 2002. For the third quarter of 2003, $14.2 million, or 42.4%,
of the increase in revenues was contributed by the Domestic Services platform
while $19.3 million, or 57.6%, of the increase was contributed by the
International Services platform. On a same store basis in the third quarter of
2003, the Domestic Services platform delivered $9.7 million, or 44.9% growth
over the third quarter of 2002 and the International Services platform delivered
$12.5 million, or 56.1% growth over the third quarter of 2002. For the third
quarter of 2003, the acquisitions of Regroup Express LLC ("Regroup"), Customs
Services International, Inc. ("CSI") and the Singapore and Cambodia based
operations of the G-Link Group ("G-Link") contributed total revenue of $11.3
million.
Net transportation revenue was $13.4 million in the third quarter of
2003, an increase of $4.7 million or 54.8% over net transportation revenue of
$8.6 million in the third quarter of 2002. For the third quarter of 2003, $2.8
million, or 59.2%, of the increase in net transportation revenue was attributed
to growth in the Domestic Services platform while $1.9 million or 40.8% of the
increase was attributed to growth in the International Services platform. Net
transportation margins remained relatively flat quarter on quarter in the
International Services platform, but declined in the Domestic Services platform
from 31.7% to 27.5% of total transportation revenue as a result of margin
pressure experienced in key mid-west markets.
Net revenue was $18.7 million in the third quarter of 2003, an increase
of $6.7 million or 55.5% over net revenue of $12.0 million in the third quarter
of 2002. For the third quarter of 2003, $3.6 million or 54.2% of the increase in
net revenue was attributed to growth in the Domestic Services platform, while
$3.1 million or 45.8% of the increase was attributed to growth in the
International Services platform.
21
The following table compares certain historical consolidated statement
of operations data as a percentage of our net revenue (in thousands):
Quarter ended September 30,
-------------------------------------------------------------------------------
Restated
2003 2002 Change
------------------------ ----------------------- ----------------------------
Amount Percent Amount Percent Amount Percent
Net revenue $18,656 100.0% $11,996 100.0% $ 6,660 55.5%
Personnel costs 9,143 49.0% 5,595 46.6% 3,548 63.4%
Other selling, general and administrative 5,817 31.2% 3,755 31.3% 2,062 54.9%
Depreciation and amortization 719 3.9% 653 5.4% 66 10.1%
Litigation settlement and non-recurring costs 429 2.3% - 0.0% 429 NM
------ ----- ------- ----- ---------
Income from operations 2,548 13.7% 1,993 16.6% 555 27.9%
Other income (expense), net (215) (1.2%) 79 0.7% (294) (372.2%)
------ ----- ------- ----- ---------
Income from continuing operations before income 2,333 12.5% 2,072 17.3% 261 12.6%
taxes and minority interest
Income taxes 173 0.9% 80 0.7% 93 116.3%
------ ----- ------- ----- ---------
Income from continuing operations before 2,160 11.6% 1,992 16.6% 168 8.4%
minority interest
Minority interest 85 0.5% -- 0.0% 85 NM
------ ----- ------- ----- ---------
Income from continuing operations 2,075 11.1% 1,992 16.6% 83 4.2%
Loss from discontinued operations, net of tax -- 0.0% -- 0.0% -- --
------ ----- ------- ----- ---------
Net income 2,075 11.1% 1,992 16.6% 83 4.2%
Preferred stock dividends, net -- 0.0% 16,800 140.0% (16,800) (100.0%)
------ ----- ------- ----- ---------
Net income attributable to common stockholders $2,075 11.1% $18,792 156.6% $ (16,717) (89.0%)
====== ===== ======= ===== =========
Personnel costs were $9.1 million for the third quarter of 2003, an
increase of $3.5 million or 63.4% over $5.6 million for the third quarter of
2002. Of the increase, $0.3 million or 9.7% was attributed to organic growth in
the Domestic Services platform. $2.9 million or 82.3% of the increase was
attributed to the International Services platform, driven primarily by the
acquisitions of CSI and G-Link which added approximately 90 people. Personnel
costs as a percentage of net revenue increased to 49.0% in the third quarter of
2003 from 46.6% in the third quarter of 2002.
22
Other selling, general and administrative costs were $5.8 million for
the third quarter of 2003, an increase of $2.1 million or 54.9% over $3.8
million for the third quarter of 2002. For the third quarter of 2003, $0.5
million or 23.8% of the increase in other selling, general and administrative
costs was attributed to incremental costs associated with the addition of
Regroup to the Domestic Services platform while $1.2 million or 57.3% of the
increase was attributed to the International Services platform driven primarily
by selling, general and administrative costs associated with CSI and G-Link. As
a percentage of net revenue, other selling, general and administrative costs in
the third quarter of 2003 remained approximately level with the third quarter of
2002 at 31.2%.
Depreciation and amortization costs were $0.7 million for the third
quarter of 2003, remaining level with the third quarter of 2002. As discussed in
Note 2 to the unaudited consolidated financial statements, amortization expense
associated with the customer relationship intangible asset has increased for the
third quarter of 2002 based on the outcome of our discussions with the SEC.
Litigation settlement and non-recurring costs in the third quarter of
2003 totaled approximately $0.4 million and relates to the SEC review and
delayed effectiveness of a registration statement issued in connection with a
March 2003 private placement.
Income from operations was $2.5 million in the third quarter of 2003,
as compared to $2.0 million for the third quarter of 2002. Income from
operations as a percentage of net revenue decreased to 13.7% for the third
quarter of 2003 from 16.6% for the same period in 2002.
Other expense, net for the third quarter of 2003 was $0.2 million
compared to other income, net of $0.1 million in 2002. With quarter over quarter
cash balances being reduced as a result of our acquisition program, interest
income remained an insignificant component to the Company's overall financial
performance for the third quarter of 2003 and 2002.
As a result of historical losses related to investments in early-stage
technology businesses, the Company has accumulated federal net operating loss
carryforwards ("NOLs"). Although a portion of this loss may be subject to
certain limitations, the Company expects it will be able to use approximately
$21.7 million of the loss to offset current and future federal taxable income.
As a result, the Company is currently only subject to certain state and local
taxes.
Income from continuing operations before minority interest was $2.2
million in the third quarter of 2003, an improvement of $0.2 million over income
from continuing operations of $2.0 million in the third quarter of 2002.
Minority interest for the period was approximately $0.1 million and was
related primarily to the G-Link operations acquired in August of 2003, of which
the Company owns a 70% interest.
The Company had no preferred stock dividends in the third quarter of
2003 as compared to a net non-cash benefit of $16.8 million associated with the
restructuring of our Series C Preferred Stock in the third quarter of 2002. See
Note 7 to the unaudited consolidated financial statements.
23
Net income attributable to common stockholders was $2.1 million in the
third quarter of 2003, a decrease of $16.7 million over net income attributable
to common stockholders of $18.8 million in the third quarter of 2002, primarily
due to the non-cash effect of the net $16.8 million associated with the
restructuring of our Series C Preferred Stock. Basic earnings per common share
were $0.07 for the third quarter of 2003 compared to $0.82 for the third quarter
of 2002. Diluted earnings per common share were $0.05 for the third quarter of
2003 compared to $0.07 per diluted common share for the third quarter of 2002.
Nine months ended September 30, 2003 compared to nine months ended
September 30, 2002
The following table compares our historical total revenue, net
transportation revenue and other revenue (in thousands):
Nine months ended September 30,
----------------------------------------------
Percent
2003 2002 Change
-------- -------- ---------
Total revenue $177,115 $ 89,615 97.6%
======== ========
Transportation revenue $165,302 $ 83,086 99.0%
Cost of transportation 132,170 64,414 105.2%
-------- --------
Net transportation revenue
33,132 18,672 77.4%
Net transportation margins 20.0% 22.5%
Customs brokerage 7,294 3,952 84.6%
Warehousing and other
value added services 4,519 2,577 75.4%
-------- --------
Total net revenue $ 44,945 $ 25,201 78.3%
======== ========
Total revenue was $177.1 million in the first nine months of 2003, an
increase of $87.5 million or 97.6% over total revenue of $89.6 million in the
first nine months of 2002. For the first nine months of 2003, $36.8 million, or
42.1%, of the increase in revenues was contributed by the Domestic Services
platform while $50.7 million, or 57.9%, of the increase was contributed by the
International Services platform. Excluding revenues from the operations we
acquired during 2002 and 2003, for the first nine months of 2003, the Domestic
Services platform delivered $18.6 million, or 41.6% growth over the first nine
months of 2002. Revenues attributable to operations that were acquired either in
2002 or 2003 were $68.9 million.
Net transportation revenue was $33.1 million in the first nine months
of 2003, an increase of $14.5 million or 77.4% over net transportation revenue
of $18.7 million in the first nine months of 2002. For the first nine months of
2003, $9.5 million, or 65.7% of the increase in net transportation revenues was
attributed to growth in the Domestic Services platform while $5.0 million, or
34.3% of the increase was attributed to growth in the International Services
platform. Net transportation margins decreased to 20.0% for the first nine
months of 2003 from 22.5% for the first nine months of 2002. This decrease in
historical transportation margins is primarily the result of the additional
relative contribution of our International Services platform which traditionally
generates lower transportation margins.
24
Net revenue was $44.9 million in the first nine months of 2003, an
increase of $19.7 million or 78.3% over net revenue of $25.2 million in the
first nine months of 2002. For the first nine months of 2003, $11.1 million, or
56.4%, of the increase in net revenues was attributed to growth in the Domestic
Services platform while $8.6 million, or 43.6%, of the increase was attributed
to growth in the International Services platform.
The following table compares certain consolidated statement of
operations data as a percentage of our net revenue (in thousands):
Nine months ended September 30,
---------------------------------------------------------------------------------
2003 2002 Change
------------------------ -------------------------- ----------------------------
Amount Percent Amount Percent Amount Percent
Net revenue $44,945 100.0% $25,201 100.0% $ 19,744 78.3%
Personnel costs 22,709 50.5% 12,715 50.5% 9,994 78.6%
Other selling, general and administrative costs 16,178 36.0% 9,942 39.4% 6,236 62.7%
Depreciation and amortization 1,880 4.2% 1,619 6.4% 261 16.1%
Litigation settlement and non-recurring costs 1,179 2.6% -- 0.0% 1,179 NM
------- ----- ------- ----- --------
Income from operations 2,999 6.7% 925 3.7% 2,074 224.2%
Other income (expense), net (131) (0.3%) 188 0.7% (319) (169.9%)
------- ----- ------- ----- --------
Income from continuing operations before income 2,868 6.4% 1,113 4.4% 1,755 157.7%
taxes and minority interest
Income taxes 231 0.5% 80 0.3% 151 188.9%
------- ----- ------- ----- --------
Income from continuing operations before
minority interest 2,637 5.9% 1,033 4.1% 1,604 155.3%
Minority interest 85 0.2% -- 0.0% 85 NM
------- ----- ------- ----- --------
Income from continuing operations 2,552 5.7% 1,033 4.1% 1,519 147.1%
Loss from discontinued operations, net of tax (355) (0.8%) -- 0.0% (355) NM
------- ----- ------- ----- --------
Net income 2,197 4.9% 1,033 4.1% 1,164 112.7%
Preferred stock dividends, net -- 0.0% 15,020 59.6% (15,020) (100.0%)
------- ----- ------- ----- --------
Net income attributable to common stockholders $ 2,197 4.9% $16,053 63.7% $(13,856) (86.3%)
======= ===== ======= ===== ========
Personnel costs were $22.7 million for the first nine months of 2003,
an increase of $10.0 million or 78.6% over $12.7 million for the first nine
months of 2002. Notwithstanding the significant dollar growth in personnel
costs, as a percentage of net revenue, personnel costs remained level with the
first nine months of 2002 at 50.5%. Of the increase, $5.2 million, or 52.4%, was
attributed to the Domestic Services platform, driven primarily by the
acquisition of United American in the second quarter of 2002 and Regroup in the
second quarter of 2003. The International Services platform accounted for $4.5
million, or 45.1% of the increase, due to the acquisition of Stonepath Logistics
International Services, Inc. ("SLIS") (f/k/a Global Transportation Services,
Inc.) in the second quarter of 2002 and G-Link and CSI in the third quarter of
2003.
25
Other selling, general and administrative costs were $16.2 million for
the first nine months of 2003, an increase of $6.2 million or 62.7% over $9.9
million for the first nine months of 2002. For the first nine months of 2003,
$3.7 million, or 59.9% of the increase in other selling, general and
administrative costs was attributed to growth in the Domestic Services platform
and $1.6 million, or 26.0% of the increase was attributed to the International
Services platform. As a percentage of net revenue, other selling, general and
administrative costs decreased to 36.0% in the first nine months of 2003 from
39.4% in the first nine months of 2002 because of a substantially larger net
revenue base over which to spread the other selling, general and administrative
costs.
Depreciation and amortization costs were $1.9 million for the first
nine months of 2003, an increase of 16.1% over $1.6 million for the first nine
months of 2002 driven principally by the increase in amortizable intangible
assets resulting from our acquisition strategy. As discussed in Note 2 to the
unaudited consolidated financial statements, amortization expense associated
with the customer relationship intangible asset has been increased in 2002 based
on the outcome of our discussions with the SEC.
The litigation settlement and non-recurring costs in 2003 amounted to
$1.2 million and is comprised of $0.8 million paid to settle litigation
commenced against the Company in August 2000 in a combination of $0.4 million in
cash and $0.4 million in Company common stock and $0.4 million associated with
the SEC review and delayed effectiveness of a registration statement issued in
connection with a March 2003 private placement.
Income from operations was $3.0 million in the first nine months of
2003, as compared to $0.9 million for the first nine months of 2002. Income from
operations as a percentage of net revenue increased to 6.7% for the first nine
months of 2003 from 3.7% for the same period in 2002.
Other expense, net for the first nine months of 2003 was $0.1 million,
which was primarily driven by interest expense on outstanding borrowings against
the Company's line of credit. In 2003, the Company became a net borrower
accessing its line of credit to fund increased working capital and the
acquisitions of Regroup, G-Link and CSI. In the comparable period in 2002, other
income, net was $0.2 million, which was driven primarily by interest income on
cash balances maintained by the Company.
As a result of historical losses related to investments in early-stage
technology businesses, the Company has accumulated federal NOLs. Although a
portion of this loss may be subject to certain limitations, the Company expects
it will be able to use approximately $21.7 million of the loss to offset current
and future federal taxable income. As a result, the Company is currently only
subject to certain state and local taxes.
26
Income from continuing operations before minority interest was $2.6
million or 5.9% of net revenue in the first nine months of 2003, an improvement
of $1.6 million over $1.0 million or 4.1% of net revenue in the first nine
months of 2002.
Minority interest for the period was approximately $0.1 million and was
related primarily to the G-Link operations acquired in August of 2003.
Loss from discontinued operations totaled approximately $0.4 million
and included $0.2 million recorded in connection with a property previously used
in the Company's former internet business and $0.1 million related to a
settlement with a consultant to the Company's former internet business which the
Company satisfied through the issuance of 50,000 shares of Company common stock
The Company had no preferred stock dividends in the first nine months
of 2003 as compared to a net non-cash benefit of $15.0 million associated with
the restructuring of our Series C Preferred Stock in the first nine months of
2002. See Note 7 to the unaudited consolidated financial statements.
Net income attributable to common stockholders was $2.2 million in the
first nine months of 2003, compared to net income attributable to common
stockholders of $16.1 million in the first nine months of 2002 due primarily to
the non-cash effect of the net $15.0 million associated with the restructuring
of our Series C Preferred Stock. Basic and diluted earnings per common share
were $0.08 and $0.06, respectively, for the first nine months of 2003, compared
to $0.74 per basic and $0.04 per diluted common share for the first nine months
of 2002.
Financial Outlook
For 2003, the Company is maintaining its $8.5 million guidance for
EBITDA on expected revenue of $240 million, and expects to exceed its prior net
earnings guidance of $5.0 million due to the non-cash tax benefits it expects to
record in the fourth quarter of 2003. This guidance includes the earnings power
of the recent acquisitions, as well as the on-going costs of integration and
non-recurring costs experienced through September.
Because of the potential discrepancy between our GAAP-based financials
and the economic reality of our business resulting from the possible increased
amortization related to customer relationship intangible assets, we believe
EBITDA is a useful non-GAAP performance measure.
A reconciliation of EBITDA to the most directly comparable GAAP measure
in accordance with SEC Regulation S-K follows:
(amounts in millions)
Net income $ 5.0
Interest expense/(income) 0.5
Income tax expense/(benefit)* (0.0)
Depreciation and amortization 3.0
------
EBITDA (Earnings before interest, taxes, depreciation and amortization) $ 8.5
======
* The Company maintains a valuation allowance to offset the net deferred tax
assets associated with the tax losses generated prior to the Company's move into
the logistics business. The Company expects to remove all or a portion of this
valuation allowance in the fourth quarter which would result in the Company
recording a non-cash tax benefit in the fourth quarter of 2003 and report a net
income tax benefit for the full year. This net income tax benefit has not been
reflected in the Company's full year guidance.
27
Our revenue and net income estimates have been developed based on a
number of principal assumptions including, among others: (i) that revenue and
net income will continue to grow at an annual rate that is consistent with
recent results; (ii) that operating margins will not decline from current
levels; (iii) that no material economic or customer disruptions will occur; (iv)
that we will not be required to repay some portion or all of $1.3 million
received by us as a payment of pre-petition indebtedness during the bankruptcy
of a material customer; (v) that we will not be caused to incur charges as a
result of the threatened bankruptcy of a significant customer serviced by the
recently acquired business of Regroup; (vi) that the methodologies adopted and
amounts allocated by the Company for amortizable intangibles associated with
acquisitions completed in 2003 remain consistent with current accounting
standards, as interpreted by the SEC; and (vii) that the risks otherwise
identified in our Annual Report on Form 10-K/A for the year ended December 31,
2002 under "Risks Particular to our Business" will not have an adverse effect on
our operations. In prior forward-looking guidance, we had assumed that each of
our operating companies, on a stand-alone basis, would deliver the level of
pre-tax operating income necessary to fully achieve the earn-out payments under
each of their acquisition agreements. Our present guidance no longer relies upon
that assumption based upon year to date performance of certain of our operating
units, and since some of our most recent acquisitions establish earn-out levels
based upon forecasted, rather than current levels of earnings.
Assuming we can continue to execute on our business plan and
acquisition model without any material disruptions, and identify and close
transactions similar to the transactions accomplished to date, it is our goal to
generate $500.0 million in annualized revenue by the end of 2006.
Notwithstanding our expectations regarding our ability to deliver these results,
we can never be certain that future revenue or earnings will be achieved at any
particular level. Estimates of future financial performance are forward-looking
statements and are subject to uncertainty created by the risk elements otherwise
identified in our Annual Report on Form 10-K/A for the year ended December 31,
2002 under "Risks Particular to our Business." Furthermore, even though we
believe our current operations will achieve a certain level of earnings on an
annual basis, our interim results are subject to seasonal trends.
Sources of Growth
Management believes that a comparison of "same store" growth is
critical in the evaluation of the quality and extent of the Company's internally
generated growth. This "same store" analysis isolates the financial
contributions from operations that have been included in the Company's operating
results for the full comparable prior year period. The table below presents
"same store" comparisons for the three- and nine-month periods ended September
30, 2003 (which is the measure of any increase from the same period of 2002).
28
For the three months For the nine months ended
ended September 30, 2003 September 30, 2003
Domestic 44.9% 21.3%
International 56.1% N/A
Liquidity and Capital Resources
Prior to the adoption of our current business model, our operations
consisted of developing early-stage technology businesses. These operations did
not generate sufficient operating funds to meet our cash needs, and, as a
result, we funded our historic operations with the proceeds from a number of
private placements of debt and equity securities. With the advent of our new
business model, we expect to be able to fund our operations with the cash flow
generated by the businesses we acquire. We are also in an acquisitive mode and
expect to deploy material amounts of capital as we execute our business plan.
Therefore, it is likely that we will need to raise additional capital in the
future. There can be no assurance that we will be able to raise additional
capital on terms acceptable to us, if at all.
Cash and cash equivalents totaled $1.1 million and $2.3 million as of
September 30, 2003 and December 31, 2002, respectively. Working capital totaled
$5.8 million and $5.3 million at September 30, 2003 and December 31, 2002,
respectively.
Cash used in operating activities was $11.0 million for the first nine
months of 2003 compared to $4.1 million used in the first nine months of 2002.
This decrease was primarily driven by an increase in accounts receivable over
the first nine months of 2003, which in turn was driven by the substantial
increase in revenue over the same period plus the fact that existing receivables
were not acquired in some of the 2003 acquisitions.
Net cash used in investing activities during the first nine months 2003
was $15.2 million compared to $11.3 million in the first nine months of 2002.
Investing activities in 2003 were driven principally by $7.7 million related to
our acquisitions of Regroup, CSI and G-Link, approximately $3.5 million in
earn-out payments made in relation to 2002 performance targets in connection
with prior acquisitions and $3.9 million for the purchase of furniture and
equipment primarily related to the roll-out of Tech-Logis(TM), the Company's new
web-based technology platform.
Cash from financing activities in the first nine months of 2003
included a private placement of 4,470,000 shares of our common stock in exchange
for net proceeds of approximately $5.6 million. During the first nine months of
2003, we utilized $17.1 million under our credit facility, principally in
connection with the payment of earn-outs and the acquisitions of Regroup, G-Link
and CSI, and received approximately $2.0 million related to the financing of
certain equipment under a capital lease arrangement. The Company's line of
credit balance at September 30, 2003 is made up principally of $12.2 million of
outstanding borrowings and $5.5 million of outstanding checks offset by $0.6
million of deposits in transit.
29
We may also receive proceeds in the future from the exercise of
existing options and warrants. As of September 30, 2003, approximately 13.1
million options and warrants were outstanding. The proceeds received by the
Company, if all options and warrants were exercised, would be approximately
$16.9 million.
On October 16, 2003, we completed the private placement of 5,983,500
shares of our common stock at a price of $2.20 per share, for gross proceeds of
$13.2 million. In connection with this transaction, we paid a brokerage fee of
four (4%) percent, or $0.5 million. We used the proceeds from the private
placement to pay down outstanding borrowing under the credit facility. To
satisfy a requirement of the private placement agreement, we have recently
completed the registration of the shares issued in the private placement. The
registration process, as completed, permits the public resale of the shares.
To ensure that we have adequate near-term liquidity, we maintain a
revolving credit facility of $20.0 million (the "Facility") with LaSalle
Business Credit, Inc. that is collateralized by accounts receivable and other
assets of the Company and its subsidiaries. The Facility was increased in
September 2003 from $15.0 million to provide for additional flexibility for the
Company's acquisition and on-going working capital requirements. The Facility
requires the Company and its subsidiaries to comply with certain financial
covenants that may limit or otherwise govern the Company's ability to make
acquisitions. Advances under the Facility are available to fund future
acquisitions, capital expenditures or for other corporate purposes. We expect
that the cash flow from our existing operations and any other businesses
acquired during the year will be sufficient to support our corporate overhead
and some portion of the contingent earn-out payments or other cash requirements
associated with our acquisitions. Therefore, we anticipate that our primary uses
of capital in the near term will be to finance the cost of new acquisitions and
to pay any portion of existing earn-out arrangements that cash flow from
operations is otherwise unable to fund.
Under the terms of the Facility, we are permitted to make additional
acquisitions without the lender's consent only if certain conditions are
satisfied. The conditions imposed by the Facility include the following: (i) the
absence of an event of default under the Facility, (ii) the company to be
acquired must be in the transportation and logistics industry, (iii) the
purchase price to be paid must be consistent with our historical business and
acquisition model, (iv) the undrawn availability under the Facility must average
$5.0 million for the 60 days preceding the acquisition and must be at least $5.0
million after giving effect for the acquisition, (v) the lender must be
reasonably satisfied with projected financial statements we provide covering a
12 month period following the acquisition, (vi) the acquisition documents must
be provided to the lender and must be consistent with the description of the
transaction provided to the lender, (vii) the aggregate cash disbursed to
support the purchase and operation of our foreign operations must not exceed
$11.3 million, and (viii) the number of permitted acquisitions is limited to
four per year (excluding any acquisitions for which the purchase price is
payable solely in stock). In the event that we were not able to satisfy the
conditions of the Facility in connection with a proposed acquisition, we would
have to forego the acquisition unless we either obtained the lender's consent or
retired the Facility. This may limit or slow our ability to achieve the critical
mass we may need to achieve our strategic objectives.
As of November 14, 2003, we had no borrowings outstanding under our
Facility and we had eligible accounts receivable sufficient to support access to
the full amount of the Facility. However, the terms of our Facility are subject
to certain financial covenants which may limit the amount otherwise available
under the Facility. Principal among these are financial covenants that limit
availability based upon measures of our cash flow, as well as a multiple of
funded debt to consolidated EBITDA of our domestic operations. Under the funded
debt to consolidated EBITDA covenant, our funded debt is limited to a multiple
of 2.75 of our domestic EBITDA measured on a rolling four quarter basis. For
example, based on a rolling four quarter domestic EBITDA of approximately $6.0
million, we would be limited to $16.5 million in funded debt. The domestic
component of our current 2003 EBITDA guidance would provide capacity in excess
of the $20.0 million availability under our Facility. If our rolling four
quarter domestic EBITDA decreases, the availability under our Facility could be
negatively impacted.
30
We believe that our current working capital and anticipated cash flow
from operations are adequate to fund existing operations. However, our ability
to finance further acquisitions is limited by the availability of additional
capital. We may finance acquisitions, however, using our common stock as all or
some portion of the consideration. In the event that our common stock does not
attain or maintain a sufficient market value or potential acquisition candidates
are otherwise unwilling to accept our securities as part of the purchase price
for the sale of their businesses, we may be required to utilize more of our cash
resources, if available, in order to continue our acquisition program. If we do
not have sufficient cash resources through either operations or from debt
facilities, our growth could be limited unless we are able to obtain such
additional capital.
We have used a significant amount of our available capital to finance
acquisitions. Our acquisitions are normally structured with certain amounts paid
at closing, and the balance paid over a number of years in the form of earn-out
installments which are payable based upon the future earnings of the acquired
businesses. We will be required to make significant payments in the future if
the earn-out installments under our various acquisitions become due. While we
believe that a portion of the required payments will be generated by the
acquired businesses, we may have to secure additional sources of capital to fund
the remainder of the earn-out payments as they become due. This presents us with
certain business risks relative to the availability of capacity under our
Facility, the availability and pricing of future fund raising, as well as the
potential dilution to our stockholders if the fund raising involves the sale of
equity.
The acquisition of Air Plus was completed subject to an earn-out
arrangement of $17.0 million. We agreed to pay the former Air Plus shareholders
installments of $3.0 million in 2003, $5.0 million in 2004, $5.0 million in 2005
and $4.0 million in 2006, with each installment payable in full if Air Plus
achieves pre-tax income of $6.0 million in each of the years preceding the year
of payment. In the event there is a shortfall in pre-tax income, the earn-out
payment will be reduced on a dollar-for-dollar basis to the extent of the
shortfall. Shortfalls may be carried over or carried back to the extent that
pre-tax income in any other pay-out year exceeds the $6.0 million level. Based
upon 2002 performance, former Air Plus shareholders were entitled to receive
$3.0 million, and have excess earnings of $0.3 million as a carryforward against
future earnings targets. Former Air Plus shareholders elected to receive $2.6
million of the earn-out payable for 2002 in cash with the balance paid in shares
of the Company's common stock in April 2003.
On April 4, 2002, we acquired SLIS, a Seattle-based privately-held
company that provides a full range of international air and ocean logistics
services. The transaction was valued at up to $12.0 million, consisting of cash
of $5.0 million paid at the closing and up to an additional $7.0 million payable
over a five-year earn-out period based upon the future financial performance of
SLIS. We agreed to pay the former SLIS shareholders a total of $5.0 million in
base earn-out payments in installments of $0.7 million in 2003, $1.0 million in
2004 through 2007 and $0.3 million in 2008, with each installment payable in
full if SLIS achieves pre-tax income of $2.0 million in each of the years
preceding the year of payment (or the pro rata portion thereof in 2002 and
2007). In the event there is a shortfall in pre-tax
31
income, the earn-out payment will be reduced on a pro rata basis. Shortfalls may
be carried over or carried back to the extent that pre-tax income in any other
earn-out year exceeds the $2.0 million level. The Company has also provided the
former SLIS shareholders with an additional incentive to generate earnings in
excess of the base $2.0 million annual earnings target ("SLIS' tier-two
earn-out"). Under SLIS' tier-two earn-out, former SLIS shareholders are also
entitled to receive 40% of the cumulative pre-tax earnings in excess of $10.0
million generated during the five-year earn-out period subject to a maximum
additional earn-out opportunity of $2.0 million. SLIS would need to generate
cumulative earnings of $15.0 million over the five-year earn-out period in order
for the former SLIS shareholders to receive the full $7.0 million in contingent
earn-out payments. Based upon 2002 performance, former SLIS shareholders
received $0.7 million on April 1, 2003, and have excess earnings of $2.3 million
as a carryforward against future earnings targets.
On May 30, 2002 we acquired United American, a Detroit-based
privately-held provider of expedited transportation services. The United
American transaction provided us with a new time-definite service offering
focused on the automotive industry. The transaction is valued at up to $16.1
million, consisting of cash of $5.1 million paid at closing and a four-year
earn-out arrangement based upon the future financial performance of United
American. We agreed to pay the former United American shareholder a total of
$5.0 million in base earn-out payments in installments of $1.25 million in 2003
through 2006, with each installment payable in full if United American achieves
pre-tax income of $2.2 million in each of the years preceding the year of
payment. In the event there is a shortfall in pre-tax income, the earn-out
payment will be reduced on a dollar-for-dollar basis to the extent of the
shortfall. Shortfalls may be carried over or carried back to the extent that
pre-tax income in any other pay-out year exceeds the $2.2 million level. The
Company has also provided the former United American shareholder with an
additional incentive to generate earnings in excess of the base $2.2 million
annual earnings target ("United American's tier-two earn-out"). Under United
American's tier-two earn-out, the former United American shareholder is also
entitled to receive 50% of the cumulative pre-tax earnings generated by a
certain pre-acquisition customer in excess of $8.8 million during the four-year
earn-out period subject to a maximum additional earn-out opportunity of $6.0
million. United American would need to generate cumulative earnings of $20.8
million over the four-year earn-out period in order for the former United
American shareholder to receive the full $11.0 million in contingent earn-out
payments. Based upon 2002 performance, the former United American shareholder
received $0.2 million in the first quarter of 2003, and has an earnings
shortfall of $1.0 million. In future years, earnings in excess of the $2.2
million earnings target would first be applied against the $1.0 million
shortfall.
On October 1, 2002 we acquired Stonepath Logistics Government Services,
Inc. ("SLGS") (f/k/a Transportation Specialists, Inc.), a Northern
Virginia-based privately-held provider of expedited domestic and international
transportation services. The SLGS transaction capitalized on SLGS' existing base
of government contract work in the Washington metropolitan area and served as a
supplement to an existing Company-operated facility in that area. The
transaction was valued at up to $1.1 million, consisting of cash of $0.5 million
paid at closing, and a three-year earn-out arrangement. The Company agreed to
pay the former SLGS shareholder $0.2 million for each year in the three-year
earn-out period ending December 31, 2005, based upon the annual net revenue
targets of $1.6 million. In the event there is a shortfall in net revenue, the
earn-out payment will be reduced proportionally to the extent of the shortfall,
provided no earn-out payment shall be made if net revenue for the year falls
below $1.0 million. Shortfalls may be carried over or carried back to the extent
that net revenue in any other pay-out year exceeds the $1.6 million level.
32
On June 20, 2003, through our indirect wholly owned subsidiary, SLGS,
we acquired the business of Regroup, a Virginia limited liability company. The
Regroup transaction enhanced our presence in the Washington, D.C. market and
provided a platform to focus on the logistics needs of U.S. government agencies
and contractors. The transaction was valued at up to $27.2 million, consisting
of cash of $3.7 million and $1.0 million of Company stock paid at closing, and a
five-year earn-out arrangement. The Company agreed to pay the members of Regroup
a total of $10.0 million in base earn-out payments payable in equal installments
of $2.5 million in 2005 through 2008, if Regroup achieves pre-tax income of $3.5
million in each of the years preceding the year of payment. In the event there
is a shortfall in pre-tax income, the earn-out payment will be reduced on a pro
rata basis. Shortfalls may be carried over or carried back to the extent that
pre-tax income in any other pay-out year exceeds the $3.5 million level. The
Company has also provided the former members of Regroup with an opportunity to
earn an additional payment of $2.5 million if Regroup earns $3.5 million in
pre-tax income during the 12 month period commencing July 1, 2003. In addition,
the Company has also provided the former members of Regroup with an additional
incentive to generate earnings in excess of the base $3.5 million annual
earnings target ("Regroup's tier-two earn-out").
Under Regroup's tier-two earn-out, the former members of Regroup are
also entitled to receive 50% of the cumulative pre-tax earnings in excess of
$17.5 million generated during the five-year earn-out period subject to a
maximum additional earn-out opportunity of $10.0 million. Regroup would need to
generate cumulative earnings of $37.5 million over the five-year earn-out period
in order for the former members to receive the full $22.5 million in contingent
earn-out payments.
On July 16, 2003, through our indirect wholly owned subsidiary, SLIS,
we acquired the business of CSI, a Miami-based, privately held international
freight forwarder and leading customs broker. The acquisition significantly
enhanced our presence in Miami and provided a powerful platform to service
Central America, South America, and the Caribbean. The transaction was valued at
up to $3.8 million, consisting of cash of $1.4 million paid at the closing and
up to an additional $2.4 million payable over a five-year earn-out period based
upon the future financial performance of CSI. We agreed to pay the former CSI
shareholders a total of $2.4 million in base earn-out payments in installments
of $0.2 million in 2004, $0.5 million in 2005 through 2007 and $0.7 million in
2008, with each installment payable in full if CSI achieves pre-tax income of
$0.8 million in each of the years preceding the year of payment (or the pro rata
portion thereof in 2003 and 2007). In the event there is a shortfall in pre-tax
income, the earn-out payment will be reduced on a pro rata basis. Shortfalls may
be carried over or carried back to the extent that pre-tax income in any other
pay-out year exceeds the $0.8 million level.
33
On August 8, 2003, through two indirect international subsidiaries, we
acquired a seventy (70%) percent interest in the assets and operations of G-Link
which provide a full range of international logistics services, including
international air and ocean transportation to a worldwide customer base of
manufacturers and distributors. The G-Link transaction substantially increased
our presence in Southeast Asia and expanded our network of owned offices through
which to deliver global supply chain solutions. The transaction was valued at up
to $6.2 million, consisting of cash of $2.8 million, $0.9 million of the
Company's common stock paid at the closing, a thirty (30%) interest in the
subsidiaries which acquired the assets and an additional $2.5 million payable
over a four-year earn-out period based upon the future financial performance of
G-Link. We agreed to pay the selling companies a total of $2.5 million in base
earn-out payments in installments of $0.3 million in 2004, $0.6 million in 2005
through 2006 and $1.0 million in 2007, with each installment payable in full if
G-Link achieves pre-tax income of $1.8 million in each of the years preceding
the year of payment (or the pro rata portion thereof in 2003 and 2007). In the
event there is a shortfall in pre-tax income, the earn-out payment will be
reduced on a pro rata basis. Shortfalls may be carried over or carried back to
the extent that pre-tax income in any other pay-out year exceeds the $1.8
million level. As additional purchase price, the Company has also agreed to pay
G-Link for excess net assets estimated at $1.5 million through the issuance of
Company common stock, on a post-closing basis.
On October 7, 2003, through our subsidiary, Stonepath Logistics (Hong
Kong) Limited, we agreed to acquire a seventy (70%) percent interest in the
assets and operations of East Ocean Logistics Limited ("East Ocean"). East
Ocean, based in Hong Kong, provides a full range of international logistics
services, including air and ocean transportation. After the acquisition, the
business of East Ocean will be combined with that of our subsidiary, Stonepath
Logistics (Hong Kong) Limited. The transaction is valued at up to $2.625 million
consisting of cash of $0.7 million and $0.35 million of the Company's common
stock payable at the closing, plus up to an additional $1.575 million payable
over a five-year period based upon the future financial performance of Stonepath
Logistics (Hong Kong) Limited, including the former operations of East Ocean.
The earn-out is scheduled to be paid in installments of $0.3 million with each
installment payable in full if Stonepath Logistics (Hong Kong) Limited, achieves
pre-tax net income of at least $1.15 million in each of the earn-out years. In
the event there is a shortfall in pre-tax net income, the earn-out payment for
that year will be reduced on a dollar-for-dollar basis by the amount of the
shortfall. Shortfalls may be carried over or back to the extent that pre-tax net
income in any other pay-out year exceeds the $1.15 million level. As additional
purchase price, on a post-closing basis, the Company has also agreed to pay East
Ocean for 70% of its closing date working capital, to the extent its closing
date working capital exceeds the average level of working capital during the
one-year period prior to the closing.
On November 10, 2003, through a wholly-owned subsidiary, we agreed to
purchase a 55% interest in Shanghai-based Shaanxi Sunshine Express, Ltd.
("Shaanxi"). Shaanxi provides a wide range of customized transportation and
logistics services and supply chain solutions. The transaction is valued at up
to $11.0 million, consisting of cash of $3.5 million and $2.0 million of the
Company's common stock payable at the closing, plus up to an additional $5.5
million payable over a five-year period based upon the future financial
performance of Shaanxi. The earn-out is scheduled to be paid in installments of
$1.1 million, with each installment payable in full if Shaanxi achieves pre-tax
net income of at least $4.0 million in each of the earn-out years. In the event
there is a shortfall in pre-tax net income, the earn-out payment for that year
will be reduced on a dollar-for-dollar basis by the amount of the shortfall.
Shortfalls may be carried over or back to the extent that pre-tax net income in
any other pay-out year exceeds the $4.0 million level. As additional purchase
price, on a post-closing basis the Company has agreed to pay Shaanxi for 55% of
its closing date working capital.
34
The following table summarizes our contingent base earn-out payments
for our completed transactions, assuming full payout (in thousands)(1)(2)(3):
Stonepath Group, Inc.
Schedule of Contingent Earn-Out Payments
2004 2005 2006 2007 2008 Total
--------- --------- --------- -------- -------- ---------
Earn-out Payments
Domestic(4) $ 6,540.0 $ 9,040.0 $ 8,050.0 $2,500.0 $2,500.0 $28,630.0
International 1,463.0 2,097.0 2,097.0 2,469.0 735.0 8,861.0
--------- --------- --------- -------- -------- ---------
Total Earn-Out Payments $ 8,003.0 $11,137.0 $10,147.0 $4,969.0 $3,235.0 $37,491.0
========= ========= ========= ======== ======== =========
Prior Year Pre-Tax Earnings Targets (5)
Domestic $ 8,806.0 $12,306.0 $12,306.0 $3,500.0 $3,500.0 $40,418.0
International 3,060.0 4,553.0 4,553.0 5,609.0 947.0 18,722.0
--------- --------- --------- -------- -------- ---------
Total Pre-tax Earnings Targets $11,866.0 $16,859.0 $16,859.0 $9,109.0 $4,447.0 $59,140.0
========= ========= ========= ======== ======== =========
Earn-Outs as a Percentage of Pre-Tax
Earnings Targets
Domestic 74.3% 73.5% 65.4% 71.4% 71.4% 70.8%
International 47.8% 46.1% 46.1% 44.0% 77.6% 47.3%
Combined 67.4% 66.1% 60.2% 54.6% 72.7% 63.4%
----------
(1) Excludes the impact of prior year's pre-tax earnings carryforwards
(excess or shortfalls versus earnings targets).
(2) During the 2003-2007 earn-out period, there is an additional contingent
obligation related to tier-two earn-outs that could be as much as $18.0
million if the applicable acquired companies generate an incremental
$37.0 million in pre-tax earnings.
(3) Only closed transactions are reflected in this schedule
(4) Excludes $2.5 million contingent purchase price payable to the former
owners of Regroup in the third quarter of 2004 subject to the acquired
operations achieving a $3.5 million earnings target for the twelve-
month period commencing July 1, 2003.
(5) Aggregate pre-tax earnings targets as presented here identify the
uniquely defined earnings targets of each acquisition and should not be
interpreted to be the consolidated pre-tax earnings of the Company
which would give effect for, among other things, amortization or
impairment of intangibles created in connection with each acquisition
or various other expenses which may not be charged to the operating
groups for purposes of calculating earn-outs.
35
On May 6, 2003, we settled litigation instituted on August 20, 2000 by
Austost Anstalt Schaan, Balmore Funds, S.A. and Amro International, S.A.
Although we believed that the Plaintiffs' claims were without merit, we chose to
settle the matter at that time in order to remove any cloud of uncertainty
created by nominal claims in excess of $20.0 million, to avoid future litigation
costs and to mitigate the diversion of management attention from operations.
Notwithstanding the settlement, the Company remains subject to one
remaining material legal proceeding that arose prior to our transition to a
logistics business. That proceeding is identified in Item 1 of Part II of this
Quarterly Report on Form 10-Q. Although we believe that the claims asserted in
the proceeding are without merit, and we intend to vigorously defend this
matter, there is the possibility that the Company could incur material expenses
in the defense and resolution of this matter.
Furthermore, since the Company has not established any reserves in
connection with such claims, any such liability, if any, would be recorded as an
expense in the period incurred or estimated. This amount, even if not material
to the Company's overall financial condition, could adversely affect the
Company's results of operations in the period recorded.
One of the Company's customers which is the subject of a Chapter 11
proceeding under the Bankruptcy Code paid to the Company approximately $1.3
million of pre-petition indebtedness for shipping and delivery charges pursuant
to an order of a United States Bankruptcy Court authorizing the payment of such
charges. One of the creditors in the Chapter 11 proceeding appealed other orders
of the Bankruptcy Court authorizing the payment of pre-petition indebtedness to
other creditors for other charges and those orders have been reversed by a
United States District Court. The Company's customer has appealed the District
Court's reversal and that appeal is pending. While no action has been taken in
the Bankruptcy Court to challenge the payment made to the Company, if such
action were taken in the future and that action were successful, the Company
could be required to return all or a substantial portion of the payments made by
the customer.
A significant customer of the Regroup business has, according to public
statements, recently defaulted upon its secured lending arrangements and has
publicly threatened bankruptcy proceedings. To the extent this customer enters
bankruptcy, we could incur possible earnings charges for some portion or all of
our outstanding receivables from this customer, which as of November 10, 2003
were approximately $1.0 million. It is currently premature to speculate on the
actions that may be taken by this customer, and the impact those actions may
have on us. We are actively monitoring the situation. The cash flow impact of
any such charges, however, may be mitigated under our earn-out arrangements with
Regroup.
New Accounting Pronouncements
In December 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure," which (i) amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for an entity that voluntarily changes the fair value
based method of accounting for stock-based employee compensation, (ii) amends
the disclosure provisions of SFAS No. 123 to require prominent disclosure about
36
the effects on reported net income of an entity's accounting policy decisions
with respect to stock-based employee compensation and (iii) amends Accounting
Principles Board Opinion No. 28, "Interim Financial Reporting," to require
disclosure about those effects in interim financial information. Items (ii) and
(iii) in the new requirements of SFAS No. 148 are effective for financial
statements for fiscal years ending after December 15, 2002. The Company has
adopted the disclosure requirements described in items (ii) and (iii).
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities," which provides new guidance with respect to the
consolidation of all unconsolidated entities, including special purpose
entities. The Company is reviewing its minority interest investment in
MagRabbit-UAFS, LLC to determine what, if any, impact the adoption of
Interpretation No. 46 may have on its consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires an issuer to classify a financial instrument that is within its scope
as a liability. Many of these instruments were previously classified as equity.
SFAS No. 150 affects the issuer's accounting for three types of freestanding
financial instruments: 1) mandatorily redeemable shares, which the issuing
company is obligated to buy back in exchange for cash or other assets; 2)
instruments that do or may require the issuer to buy back some of its shares in
exchange for cash or other assets, including put options and forward purchase
contracts; and 3) obligations that can be settled with shares, the monetary
value of which is fixed, tied solely or predominantly to a variable such as a
market index, or varies inversely with the value of the issuer's shares. SFAS
No. 150 does not apply to features embedded in a financial instrument that is
not a derivative in its entirety. The adoption of SFAS No. 150 has not had, and
is not expected to have, a material effect on the Company's consolidated
financial position, results of operations or cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's investment portfolio and its line of credit.
The Company does not have any derivative financial instruments in its investment
portfolio. The Company is averse to principal loss and ensures the safety and
preservation of its invested funds by limiting default risk, market risk and
reinvestment risk. The Company invests its excess cash in institutional money
market accounts. The Company does not use interest rate derivative instruments
to manage its exposure to interest rate changes. If market interest rates were
to change by 10% from the levels at September 30, 2003, the change in interest
expense would have had an immaterial impact on the Company's results of
operations. The Company does not expect any material loss with respect to its
investment portfolio.
37
Item 4. Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934,
as of the end of the period covered by this report, the Company carried out an
evaluation of the effectiveness of the Company's disclosure controls and
procedures. This evaluation was carried out under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer. Based upon that evaluation, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective. There have been no
significant changes in the Company's internal controls or in other factors,
which could significantly affect internal controls subsequent to the date the
Company carried out its evaluation.
Disclosure controls and procedures are designed to ensure that
information required to be disclosed in Company reports filed or submitted under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in
Company reports filed under the Exchange Act is accumulated and communicated to
management, including the Company's Chief Executive Officer and Chief Financial
Officer as appropriate, to allow timely decisions regarding required disclosure.
38
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
With respect to the litigation instituted on August 20, 2000 by Austost
Anstalt Schaan, Balmore Funds, S.A. and Amro International, S.A., the parties
entered into a Settlement Agreement with the Company on May 6, 2003, pursuant to
which the controversy has been settled, the litigation withdrawn and mutual
releases executed.
On October 12, 2000, Emergent Capital Investment Management, LLC
("Emergent") filed suit against the Company and two of its officers in the
United States District Court for the Southern District of New York contending
that it was misled by statements made by the defendants in connection with the
offering of the Company's Series C Preferred Stock which closed in March 2000.
Specifically, Emergent alleges that it is entitled to rescind the transaction
because it was allegedly represented that the size of the offering would be
$20.0 million and the Company actually raised $50.0 million. Emergent seeks a
return of its $2.0 million purchase price of Series C shares. In June of 2001,
the Company moved for summary judgment in this case.
After the summary judgment motion was filed, Emergent filed a second
action against the Company and two of its officers alleging different
allegations of fraud in connection with the Series C offering. In the new
complaint, Emergent alleges that oral statements and written promotional
materials distributed by the Company at a meeting in connection with the Series
C offering were materially inaccurate with respect to the Company's investment
in Net Value, Inc., a wholly owned subsidiary of the Company. Emergent also
contends that the defendants failed to disclose certain allegedly material
transactions in which an officer was involved prior to his affiliation with the
Company. The Company filed a motion to dismiss this new action for failure to
state a claim upon which relief can be granted.
On October 2, 2001, the District Court entered an order granting
summary judgment to the defendants in the first case filed by Emergent and
dismissing Emergent's second complaint for failure to state a claim upon which
relief can be granted. The District Court allowed Emergent 20 days to file a
second amended complaint as to the second action only. On October 21, 2001,
Emergent did file a second amended complaint in the second action. The second
amended complaint did not raise any new factual allegations regarding Emergent's
participation in the offering.
The Company filed a motion to dismiss Emergent's second amended
complaint. On April 15, 2002, the District Court entered an order granting the
motion to dismiss Emergent's second amended complaint against the Company and
its former officers. The District Court refused to grant Emergent an additional
opportunity to re-plead its claims against the defendants and a final order
dismissing the matter has been entered. Emergent thereafter filed a notice of
appeal to the United States Court of Appeals for the Second Circuit. On
September 4, 2003, the Second Circuit Court of Appeals entered an opinion
39
affirming in part and reversing in part the District Court's order of dismissal
with prejudice. As a result, the Second Circuit remanded the case back to the
District Court for further proceedings. The Second Circuit upheld the dismissal
of some of Emergent's claims and determined that Emergent had stated a claim in
its complaint with respect to the remainder of the claims. The Court of Appeals
also clarified some of the legal standards applicable to Emergent's remaining
claims. The Company believes that it has substantial defenses to Emergent's
claims and intends to vigorously defend this action on remand to the District
Court.
The Company is also involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse effect on
the Company's consolidated financial position, results of operations or
liquidity. No accruals have been established for any pending legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
On August 20, 2003, we issued 50,000 shares of our common stock to
American Maple Leaf Financial Corporation in settlement of payments due under a
consulting arrangement entered into and performed during 2000. The shares were
valued for the purpose of this settlement at $0.1 million ($2.70 per share), and
were issued in a private placement transaction exempt from the registration
requirements of the Securities Act of 1933, pursuant to Section 4(2) and Rule
506 thereunder, as an issuer transaction not involving a public offering.
On August 8, 2003, we issued an aggregate of 356,433 shares of our
common stock to G-Link Express Pte., Ltd. and G-Link Express (Cambodia) Pte.,
Ltd. in partial consideration for the acquisitions of the assets and operations
of the Singapore and Cambodia offices of the G-Link Group of companies. The
shares were valued, for the purposes of the acquisition, at $0.9 million ($2.56
per share), and were issued in a private placement transaction exempt from the
registration requirements of the Securities Act of 1933, as amended, pursuant to
Section 4(2) and Rule 506 thereunder, as an issuer transaction not involving a
public offering.
On October 16, 2003, we issued 5,983,500 shares of our common stock at
$2.20 per share, to the accredited investors identified below in a private
placement transaction exempt from the registration requirements of the
Securities Act of 1933 pursuant to Section 4(2) and Rule 506 thereunder as an
issuer transaction not involving a public offering. In connection with this
transaction, we realized gross proceeds of approximately $13.2 million and paid
to Stonegate Securities, Inc. a brokerage fee consisting of cash commissions of
approximately $0.5 million or four (4%) percent.
40
Name Shares of Common Stock
---- ----------------------
A.C. Israel Enterprises, Inc. 150,000
A. Spector Capital, LLC 100,000
Atlas Capital (Q.P.), L.P. 47,125
Atlas Capital Master Fund, L.P. 141,375
Boston Partners Asset 750,000
Management, L.P.
Chilton Small Cap Partners, LP 131,976
c/o Chilton Investment Company, Inc.
Chilton Small Cap International, LP 268,024
c/o Chilton Investment Company, Inc.
Crestview Capital Fund II, L.P. 100,000
The Frost National Bank, F/b/o Renaissance US Growth Investment 75,000
Trust PLC Trust No. W00740100
The Frost National Bank, F/b/o Renaissance Capital Growth & 75,000
Income Fund III, Inc.; Trust No. W00740000
Gryphon Master Fund, LP 100,000
HSBC Global Custody, Nominee (U.K.) Limited, Designation 150,000
No. 896414
MicroCapital Fund, LP 100,000
Peter A Massaniso 50,000
Porter Partners, LP 100,000
Pequot Scout Fund, LP c/o Pequot Capital Management, Inc. 125,000
Pequot Navigator Onshore Fund, LP c/o Pequot Capital 125,000
Management, Inc.
Sherleigh Associates, Inc. 700,000
Profit Sharing Plan, Jack Silver Trustee
Smith Barney Investment Funds, Inc., Smith Barney Small Cap 850,000
Value Fund
Southwell Partners, L.P. 1,300,000
Weiss, Peck & Greer Investments, a division of Robeco USA, L.L.C. 342,400
Westpark Capital, LP 45,000
WPG Tudor Fund 157,600
---------
TOTAL 5,983,500
=========
On or about October 24, 2003, we issued 45,548 shares of our common
stock to the accredited investors identified below in a private placement
transaction exempt from the registration requirements of the Securities Act of
1933 pursuant to Section 4(2) and Rule 506 thereunder as an issuer transaction
not involving a public offering. The shares were issued in lieu of approximately
$108,405 of liquidated damages that were owed by us as a result of a delay in
the registration of shares of common stock issued in the private placement
transaction that closed on March 6, 2003. There were no fees associated with the
issuance of the 45,548 shares of common stock.
Name Shares of Common Stock
---- ----------------------
Sherleigh Associates, Inc. Profit Sharing Plan 12,478
George C. Clairmont 5-8-51 Trust 1,872
Ingleside Company 6,240
BFS US Special Opportunities Trust PLC 12,478
Renaissance US Growth Investment Trust PLC 6,240
Renaissance Capital Growth & Income Fund III, Inc. 6,240
------
TOTAL 45,548
======
41
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
4.27 Form of subscription agreement by and between the Company and
certain holders of common stock (including exhibit providing
for registration rights)(1)
4.28 Amendment to Placement Agency Agreement between the Company
and Stonegate Securities, Inc. dated September 12, 2003(1)
4.29 Form of subscription agreement by and between the Company and
the holders of 45,548 common shares (including exhibit
providing for registration rights)(1)
31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. (This exhibit shall not
be deemed "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, or otherwise subject to the
liability of that section. Further, this exhibit shall not be
deemed to be incorporated by reference into any filing under
the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended.)
32.2 Certification of Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. (This exhibit shall not
be deemed "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, or otherwise subject to the
liability of that section. Further, this exhibit shall not be
deemed to be incorporated by reference into any filing under
the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended.)
--------------------
(1) Incorporated by reference to Registrant's Registration Statement on Form S-3
No. 333-110231, filed with the SEC on November 4, 2003.
42
(b) Reports on Form 8-K
o On July 7, 2003, the Company filed a Current Report on Form 8-K dated
June 20, 2003, reporting under Item 2 on the acquisition of the business of
Regroup Express, LLC
o On July 17, 2003, the Company furnished under Item 9 - "Regulation FD
Disclosure" of Form 8-K, a copy of a press release that was issued on July 17,
2003, relating to matters raised by the Securities and Exchange Commission over
the Company's allocation of purchase price to amortizable intangibles.
o On August 7, 2003, the Company filed an Amendment to its Current
Report on Form 8-K dated June 20, 2003, providing the financial statements under
Item 7 relating to its recent acquisition of Regroup Express, LLC
o On August 13, 2003, the Company filed a Current Report on Form 8-K
dated August 8, 2003, reporting under Item 2 on the acquisition of a 70%
interest in the Singapore and Cambodian operations of the G-Link Group of
companies, and including financial statements under Item 7 thereof.
o On August 15, 2003, the Company furnished under Item 7- "Financial
Statements, Pro Forma Financial Information and Exhibits" and Item 9 -
"Regulation FD Disclosure" of Form 8-K a copy of its earnings press release that
was issued on August 14, 2003. This release, which is required under Item 12,
"Results of Operations and Financial Condition", was included under Item 9
pursuant to interim guidance provided by the SEC.
o On August 28, 2003, the Company filed an Amendment to its Current
Report on Form 8-K dated June 20, 2003, providing under Item 7(b) amendments to
the pro forma financial statements provided with respect to the acquisition of
Regroup Express, LLC
o On August 28, 2003, the Company filed an Amendment to its Current
Report on Form 8-K dated August 8, 2003, providing under Item 7(b) amendments to
the pro forma financial statements provided with respect to the acquisition of
the Singapore and Cambodian operations of the G-Link Group of companies.
o On September 9, 2003, the Company filed a Current Report on Form 8-K
dated September 5, 2003, providing under Item 5 disclosure relative to an
increase in the Company's credit facility.
43
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Quarterly Report on Form 10-Q to be signed
on its behalf by the undersigned thereunto duly authorized.
STONEPATH GROUP, INC.
Date: November 14, 2003 /s/ Dennis L. Pelino
-------------------------------------
Dennis L. Pelino
Chief Executive Officer and
Chairman of the Board of Directors
Date: November 14, 2003 /s/ Bohn H. Crain
-------------------------------------
Bohn H. Crain
Chief Financial Officer and Treasurer
Date: November 14, 2003 /s/ Thomas L. Scully
-------------------------------------
Thomas L. Scully
Vice President and Controller and
Principal Accounting Officer
44