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 June 30, 2001
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 0-29413
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)
Two Penn Center Plaza, Suite 605
Philadelphia, PA 19102
---------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (215) 564-9193
--------------
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 |_|
There were 20,479,837 issued and outstanding shares of the registrant's common
stock, par value $.001 per share, at July 31, 2001.
STONEPATH GROUP, INC.
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements - Unaudited
Consolidated Balance Sheets at June 30, 2001
and December 31, 2000 ...............................................1
Consolidated Statements of Operations
Three months and six months ended June 30, 2001 and 2000 ............2
Consolidated Statements of Cash Flows
Six months ended June 30, 2001 and 2000 .............................3
Notes to Consolidated Financial Statements ..........................4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ......................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk .........17
Part II. Other Information
Item 1. Legal Proceedings ..................................................18
Item 2. Changes in Securities and Use of Proceeds ..........................18
Item 3. Defaults Upon Senior Securities ....................................18
Item 4. Submission of Matters to a Vote of Security Holders ................18
Item 5. Other Information ..................................................18
Item 6. Exhibits and Reports on Form 8-K ...................................19
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
STONEPATH GROUP, INC.
Consolidated Balance Sheets
(unaudited)
As of June 30 As of December 31
------------- -------------
Assets 2001 2000
------------- -------------
Current assets:
Cash and cash equivalents ................................................................. $ 33,092,712 $ 29,099,651
Available-for-sale securities ............................................................. 647,617 236,389
Interest receivable ....................................................................... -- 15,000
Loans receivable from related parties ..................................................... 158,662 217,745
Prepaid expenses .......................................................................... 50,625 91,125
------------- -------------
Total current assets ................................................ 33,949,616 29,659,910
Ownership interests in and advances to Affiliate Companies ..................................... 1,996,551 14,894,262
Furniture and equipment, net ................................................................... 80,138 228,676
Other assets ................................................................................... 27,264 127,655
------------- -------------
$ 36,053,569 $ 44,910,503
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses ..................................................... $ 433,115 $ 889,898
Net liabilities of discontinued operations ................................................ 695,000 695,000
------------- -------------
Total liabilities ................................................... 1,128,115 1,584,898
------------- -------------
Stockholders' equity:
Convertible preferred stock, Series C,
$.001 par value (3,965,819 and 3,970,206 shares authorized at 2001 and
2000; 3,799,139 and 3,657,070 issued and outstanding at 2001 and 2000,
respectively) Liquidation preference: $45,589,668 at 2001 ............................... 3,799 3,657
Common stock, $.001 par value (100,000,000 shares authorized at 2001 and 2000;
20,479,837 and 20,419,542 issued and outstanding at 2001 and 2000, respectively) ........ 20,479 20,419
Additional paid-in capital ................................................................ 208,567,605 210,923,329
Accumulated deficit ....................................................................... (170,168,599) (156,841,388)
Deferred compensation ..................................................................... (3,447,470) (10,771,724)
Accumulated other comprehensive loss ...................................................... (50,360) (8,688)
------------- -------------
Total stockholders' equity .......................................... 34,925,454 43,325,605
------------- -------------
$ 36,053,569 $ 44,910,503
============= =============
See accompanying notes to consolidated financial statements.
-1-
STONEPATH GROUP, INC.
Consolidated Statements of Operations
(unaudited)
Three months ended June 30, Six months ended June 30,
------------------------------ -------------------------------
2001 2000 2001 2000
------------------------------- -------------------------------
Revenue ..................................................... $ -- $ -- $ -- $ --
Operating expenses:
Stock-based compensation ............................... 1,413,830 7,472,562 2,648,890 13,366,749
General and administrative ............................. 1,350,778 2,313,725 2,605,167 4,417,203
----------- ----------- ----------- ------------
Total operating expenses ........................... 2,764,608 9,786,287 5,254,057 17,783,952
Interest income ............................................. (405,304) (703,989) (849,391) (915,946)
Interest expense ............................................ -- 10,851 -- 84,627
Other losses, net ........................................... 28,500 957,101 3,472,846 957,101
----------- ----------- ----------- ------------
Loss before equity in losses of Affiliate Companies 2,387,804 10,050,250 7,877,512 17,909,734
Equity in losses of Affiliate Companies ..................... 65,906 2,366,905 3,301,341 2,665,756
----------- ----------- ----------- ------------
Net loss from continuing operations ................ 2,453,710 12,417,155 11,178,853 20,575,490
----------- ----------- ----------- ------------
Discontinued operations:
(Gain) loss from discontinued operations ............... (171,484) 554,676 (171,484) 554,676
----------- ----------- ----------- ------------
Net loss .................................................... 2,282,226 12,971,831 11,007,369 21,130,166
Preferred stock dividends ................................... 891,804 959,939 2,319,842 44,012,625
----------- ----------- ----------- ------------
Net loss to common stockholders ............................. $ 3,174,030 $13,931,770 $13,327,211 $ 65,142,791
=========== =========== =========== ============
Basic and diluted net (loss) per common share -
continuing operations .................................. $ (0.16) $ (0.76) $ (0.66) $ (3.91)
Basic and diluted net earnings (loss) per common share -
discontinued operations ................................ $ 0.01 $ (0.03) $ 0.01 $ (0.03)
----------- ----------- ----------- ------------
Basic and diluted net earnings (loss) per common share ...... $ (0.15) $ (0.79) $ (0.65) $ (3.94)
=========== =========== =========== ============
Basic and diluted weighted average common shares outstanding: 20,477,003 17,672,454 20,455,389 16,521,162
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
- 2 -
STONEPATH GROUP, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended June 30
-----------------------------
2001 2000
------------- ------------
Cash flows from operating activities:
Net loss .................................................................. $(11,007,369) $(21,130,166)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization .......................................... 73,570 663,136
Stock-based compensation ............................................... 2,648,890 13,366,749
Interest paid with stock ............................................... -- 75,619
Other losses, net ...................................................... 3,472,846 957,101
Equity in losses of Affiliate Companies ................................ 3,301,341 2,665,756
(Gain) loss from discontinued operations ............................... (171,484) 554,676
Changes in assets and liabilities:
Interest receivable .................................................... 15,000 (71,609)
Prepaid expenses ....................................................... 40,500 (89,714)
Other assets ........................................................... 100,391 (61,577)
Accounts payable and accrued expenses .................................. (285,299) (245,788)
Discontinued operations ................................................ -- (187,902)
------------ ------------
Net cash used in operating activities ......................... (1,811,614) (3,503,719)
Cash flows from investing activities:
Advances to Affiliate Companies ........................................... (552,000) (3,430,000)
Purchase of available for sale securities ................................. (452,900) --
Collections on advances to Affiliate Companies ............................ 1,000,000 75,000
Acquisition of ownership interests in Affiliate Companies ................. (200,000) (6,300,000)
Proceeds from sale of ownership interests in Affiliate Companies .......... 5,979,199 --
Proceeds from sale of furniture and equipment ............................. 30,376 --
Purchases of furniture and equipment ...................................... -- (124,847)
------------ ------------
Net cash provided by (used in) investing activities ........... 5,804,675 (9,779,847)
Cash flows from financing activities:
Repayments of notes payable ............................................... -- (28,281)
Long-term debt payments ................................................... -- (79,034)
Issuance of warrants ...................................................... -- 1,099,584
Issuance of preferred stock ............................................... -- 48,274,760
Purchase of treasury stock ................................................ -- (328,147)
Payment of preferred stock dividend, Series B ............................. -- (108,464)
------------ ------------
Net cash provided by financing activities ..................... -- 48,830,418
Net increase in cash and cash equivalents ..................... 3,993,061 35,546,852
Cash and cash equivalents at beginning of year ................................. 29,099,651 3,127,232
------------ ------------
Cash and cash equivalents at end of period ..................................... $ 33,092,712 $ 38,674,084
============ ============
Cash paid for interest ......................................................... $ -- $ 29,153
============ ============
Cash paid for income taxes ..................................................... $ -- $ --
============ ============
See accompanying notes to consolidated financial statements.
- 3 -
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 2001
(1) Nature of Operations and Basis of Presentation
The principal business strategy of Stonepath Group, Inc. and subsidiaries
("Stonepath" or the "Company") is to build a global integrated logistics
services organization by identifying, acquiring, and managing controlling
interests in profitable logistics businesses. Prior to the first quarter
of 2001, Stonepath's principal business strategy focused on the
development of early-stage technology businesses with significant
Internet features and applications that Stonepath refers to as "Affiliate
Companies." Stonepath continues to provide strategic and operational
assistance to its existing Affiliate Companies and provided services to
six such businesses at June 30, 2001. Stonepath is based in Philadelphia
with an office in New York.
The accompanying unaudited consolidated financial statements were
prepared in accordance with generally accepted accounting principles for
interim financial information. 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 statements reflect all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly Stonepath's
financial position, operations and cash flows for the periods indicated.
These consolidated financial statements should be read in conjunction
with the Company's Annual Report on Form 10-K filed with the SEC on April
2, 2001.
Interim operating results are not necessarily indicative of the results
for a full year.
(2) Available-For-Sale Securities
Available-for-sale securities are reported at fair value, based on quoted
market prices, with the net unrealized gain or loss reported as a
component of other comprehensive income or loss in stockholders' equity.
During the quarter ended March 31, 2001, the Company purchased $452,900
of equity securities in a publicly held company of which approximately
48% is owned by a former shareholder and officer of Stonepath. At June
30, 2001, available-for-sale securities consist of the following:
Unrealized
Cost Loss, net Fair Value
Equity securities $ 697,977 $ (50,360) $ 647,617
============= ============= =============
- 4 -
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 2001
(3) Ownership Interests in and Advances to Affiliate Companies
The following summarizes Stonepath's ownership interests in and advances
to Affiliate Companies at June 30, 2001. All of the Affiliate Companies
are privately held companies.
Excess of carrying
value over equity Percentage of
Carrying value in net assets ownership
---------------------- ---------------------- ----------------------
Equity method:
AssetExchange $ 117,051 $ 117,051 20%
Stonepath Europe -- -- 43%
---------------- ----------------
117,051 $ 117,051
---------------- ================
Cost method:
Brightstreet -- 14%
Metacat 129,500 19%
E-Quill 450,000 8%
YesAsia 1,300,000 9%
----------------
1,879,500
----------------
$ 1,996,551
================
Metacat was previously accounted for under the equity method and
beginning in February 2001 was accounted for under the cost method as a
result of our reduced ownership percentage from 47% to 19%.
(4) Preferred Stock
Series C Preferred Stock
In March 2000, the Company sold 4,166,667 shares of its Convertible
Series C Preferred Stock (Series C Shares) at $12 per share for net
proceeds of $48,274,760 after payment of issuing costs consisting of
$1,305,240 and 35,000 Series C Shares valued at $420,000.
Each Series C Share is convertible into one share of the Company's
common stock at any time at the election of the shareholder. This
conversion ratio is subject to adjustment under certain circumstances
to protect the holders of the Series C Shares against future dilutive
transactions. The Series C Shares bear a cumulative dividend of 8% per
annum payable in kind at a deemed value of $12 per share on a
quarterly basis, have a liquidation preference of $12 per share, and
require the Company to reserve 200% of the aggregate number of common
shares issuable upon conversion of the Series C Shares and warrants.
The Series C Shares obligate the Company to redeem the issued and
outstanding Series C Shares within 60 days of receiving written notice
from holders of at least 80% of the then issued and outstanding Series
C Shares upon: (i) any voluntary or involuntary bankruptcy or
receivership, (ii) any payment default continuing for at least 120
days where the amount in default is greater than $750,000, (iii) a
consolidation or merger of the Company with or into any other
person(s) or entity(ies) other than a consolidation or merger in which
the Company is the surviving corporation, (iv) upon consummation of a
sale of all or substantially all of our assets; and (v) a sale or
other disposition of more than 50% of our voting capital stock. Any
such redemption shall be at a price equal to the greater of (i) the
liquidation value of $12 per share plus all accrued and unpaid
dividends, or (ii) the fair market value per share of the Company's
common stock on the redemption date. The Series C Shares were
initially presented as temporary equity in the Company's balance sheet
because the holders of the Series C
-5-
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 2001
(4) Preferred Stock (continued)
Series C Preferred Stock (continued)
Shares had redemption rights in the event that Stonepath did not
register the Company's common shares which the Series C Shares are
convertible into with the SEC, or in the event that Stonepath did not
file a listing application for the Company's common shares with a
national exchange. The Series C Shares were subsequently accounted for
as permanent equity in June 2000 once the Company successfully
registered the common shares and filed it's listing application as
events which could allow Series C shareholder initiated redemption
became under control of the Company.
Stonepath issued warrants to purchase an aggregate of 416,667 shares
of common stock (Series C Warrants) in connection with the issuance of
the Series C Shares. The Series C Warrants are exercisable until March
2, 2003 at an exercise price of $26.58 per share of common stock,
subject to adjustment described below. Stonepath allocated $7,391,673
of the net proceeds received from this offering to the cost of the
Series C Warrants based on a Black-Scholes option-pricing model.
In February 2001, the Company received the consent from the holders of
more than two thirds of its issued and outstanding shares of Series C
Shares to modify the use of proceeds provisions as originally defined
within the Series C Preferred Stock Purchase Agreement. As amended,
the Company may now use the proceeds from the sale of the Series C
Shares to make any investments in the ordinary course of our business,
as from time-to-time determined by the Company's Board of Directors,
or for any other business purpose approved by the Board of Directors.
Previously, Stonepath was limited to use the proceeds to investments
in early-stage Internet companies.
In exchange for this consent Stonepath agreed to:
(i) issue to the holders of the Series C Shares as of July 18, 2002,
warrants (the Series C Contingent Warrants) to purchase up to a
maximum of 3.0 million shares of the Company's common stock at an
exercise price of $1.00 per share if the then-effective conversion
price of the Series C Shares is greater than the lesser of (a) $6.00
per share; or (b) the market price of the Company's common stock at
such time (but not less than $5.00 per share) (the Target Price). The
number of Series C Contingent Warrants to be issued is that number
which, assuming conversion of all Series C Shares and the exercise of
the Series C Warrants and the Series C Contingent Warrants will reduce
the average cost of the holders investment in us to the Target Price,
reduced by the number of outstanding warrants described below; and
(ii) reduce to $1.00 per share the exercise price of the existing Series C
Warrants to purchase 416,667 shares of the Company's common stock held
by the holders of the Company's Series C Preferred Shares as of July
18, 2002.
As a condition to receiving the new warrants and the reduction in the
exercise price of the existing Series C Warrants, the holders of the Series
C Shares will be required to convert their Series C Shares into shares of
the Company's common stock on July 18, 2002.
-6-
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 2001
(4) Preferred Stock (continued)
Preferred Stock Dividends
The components of preferred stock dividends are as follows:
Three months ended June 30 Six months ended June 30
-------------------------- ------------------------
2001 2000 2001 2000
-------- ----------- ---------- ----------
Series B Preferred Stock cash dividend $ -- $ -- $ -- $ 108,464
Non-cash charge: Series C Preferred
Stock dividend payable in kind 891,804 959,939 1,757,472 1,295,834
Non-cash charge: issuance of
contingent warrants -- -- 562,370 --
Non-cash charge: beneficial conversion
feature on Series C Shares -- -- -- 42,608,327
--------------- --------------- --------------- -------------
$ 891,804 $ 959,939 $ 2,319,842 $ 44,012,625
=============== =============== =============== ==============
The Series B Preferred Stock dividend was paid in cash in February 2000
as the holders converted their Series B Shares into shares of Stonepath's
common stock. The Series C Preferred Stock dividend is payable in
additional Series C Shares on a quarterly basis at a deemed value of $12
per share and does not represent a cash obligation of the Company.
In February 2001 Stonepath agreed to issue warrants to purchase shares of
it's common stock to the holders of the Company's Series C Shares. As
further described above, these warrants (the "Contingent Warrants") are
contingently issuable upon the satisfaction of several criteria relating
to the Series C Shares including requirements over holding period,
conversion, and price. Under the relevant accounting guidance, the
Company recorded a one-time dividend equal to the estimated fair value of
the right to receive the Contingent Warrants. This dividend was
accompanied by a corresponding increase to additional paid in capital
thus leaving the Company's aggregate cash and capital position unchanged.
Additionally, this dividend will not require adjustment in the future
when the amount of Contingent Warrants are determined and ultimately
issued.
In March 2000, at the time of issuance of the Series C Shares, the then
fair market value of Stonepath's common stock was higher than the Series
C Shares sales price of $12 per share. As the Series C shares are
convertible into shares of Stonepath's common stock, this differential in
price constituted a beneficial conversion feature as defined in the
Emerging Issues Task Force Issue No. 98-5, "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios" (EITF 98-5). Accordingly, Stonepath recorded
$42,608,327 as additional paid in capital for the discount deemed related
to a preferential dividend for the beneficial conversion feature. In
accordance with EITF 98-5, this discount was limited to the proceeds
allocated to the Series C Shares and was recognized immediately as a
preferred stock dividend as the Series C Shares are immediately
convertible. This dividend was accompanied by a corresponding increase to
additional paid in capital thus leaving the Company's aggregate cash and
capital position unchanged.
-7-
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 2001
(5) Deferred Compensation
The components of deferred compensation are as follows:
Consultants and
Employees Advisory Board Total
----------------- ----------------- -----------------
Balance at beginning of year $ 10,679,930 $ 91,794 $ 10,771,724
Additions to deferred compensation 1,207 19,450 20,657
Cancellations and fair value adjustments (4,756,332) (74,756) (4,831,088)
Amortization to stock-based compensation (2,512,202) (1,621) (2,513,823)
---------------- ---------------- ----------------
Balance at June 30, 2001 $ 3,412,603 $ 34,867 $ 3,447,470
================ ================ ================
The Company also recorded stock based compensation of $135,067 relating
to investment banking, consulting, and legal services that were paid via
the issuance of 195,000 options to purchase it's common stock. Stonepath
valued these equity instruments using the Black-Scholes valuation model
on the date of issuance which is when the counterparty performance was
complete.
(6) Other Losses, net
Other losses, net consists of the following:
Three months ended June 30 Six months ended June 30
--------------------------------- --------------------------------
2001 2000 2001 2000
---------------- --------------- --------------- ---------------
Gain on sale of Webmodal holdings $ -- $ -- $ (3,617,699) $ --
Gain on sale of College411 holdings -- (195,088) -- (195,088)
Affiliate Company impairment
charges 30,000 1,152,189 6,986,870 1,152,189
Other (1,500) -- 103,675 --
---------------- --------------- --------------- ---------------
$ 28,500 $ 957,101 $ 3,472,846 $ 957,101
================ =============== =============== ===============
In March 2001, Webmodal, previously an Affiliate Company, was sold to a
wholly owned subsidiary of Enron Global Markets, LLC for $6,990,532 in
cash consisting of $5,979,199 for Stonepath's equity interest in
Webmodal, $1,000,000 as repayment by Webmodal of advances made by the
Company, and $11,333 of accrued interest thereon. The cash consideration
received for Stonepath's equity interest exceeded it's then carrying
value by $3,617,699 and accordingly the Company recorded a gain for that
amount as a result of the sale.
In May 2000, College411 was merged into a wholly owned subsidiary of
Student Advantage, Inc. whereby the College411 stockholders received
.0144 shares of Student Advantage common stock for every share of
College411 common stock which they owned on the date of the merger. As a
result of this merger, Stonepath received 55,621 shares of Student
Advantage's common stock. The fair market value of Student Advantage's
common stock received, based on publicly quoted market prices, was
$245,077, which exceeded the carrying value of our investment in
College411 by $195,088. Accordingly, we recorded a $195,088 gain as a
result of this transaction.
-8-
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 2001
(6) Other Losses, net (continued)
The Company recorded impairment charges of $6,986,870 and $1,152,189 in
2001 and 2000, respectively, for the other than temporary decline in the
fair value of four of its Affiliate Companies. From the date of
Stonepath's initial acquisition of ownership interests and subsequent
advances and investments, the Company's funding to these Affiliate
Companies represented all or a significant portion of the outside capital
the companies had available to fund their operations. In April 2001 and
June 2000, as a result of the Company's continuous evaluation process, it
was determined that these companies were unlikely to obtain further
rounds of financing necessary to sustain operations and that substantial
doubt existed over the companies' ability to repay advances made.
Accordingly, Stonepath recorded an impairment charge to reduce the
remaining carrying value of the ownership interest in and advances to
these Affiliate Companies to zero.
(7) Comprehensive Loss
Excluding net loss, the Company's source of comprehensive income is from
the net unrealized gain or loss on its marketable equity securities which
are classified as available-for-sale. The Company did not provide for a
deferred tax liability relating to the net unrealized gain as the Company
expects to have sufficient net operating losses to offset any potential
tax liability resulting from the sale of its equity holdings. The
following summarizes the components of comprehensive loss:
Three months ended June 30 Six months ended June 30
----------------------------------- -----------------------------------
2001 2000 2001 2000
------------------ --------------- --------------- ------------------
Net loss $ (2,282,226) $ (12,971,831) $ (11,007,369) $ (21,130,166)
Other comprehensive income:
Unrealized gain (loss), net (298,012) 161,651 (41,672) 161,651
----------------- --------------- --------------- -------------
Comprehensive loss $ (2,580,238) $ (12,810,180) $ (11,049,041) $ (20,968,515)
================= =============== =============== =============
(8) Net Loss per Share
Basic and diluted net loss per common share are presented in accordance
with Statement of Financial Accounting Standards No. 128, Earnings Per
Share (FAS 128), for all periods presented. In accordance with FAS 128,
basic and diluted net loss per common share have been computed using the
weighted-average number of shares of common stock outstanding during the
period. Shares associated with stock options, stock warrants, convertible
debt, and convertible preferred stock are not included because the
inclusion would be anti-dilutive (i.e., reduce the net loss per share).
The total numbers of such shares excluded from diluted net loss per
common share are 16,623,809 and 12,184,725 at June 30, 2001 and 2000,
respectively. Such securities, had they been dilutive, would have been
included in the computations of diluted loss per share using the treasury
stock method, or the if-converted method, depending on the type of
security.
-9-
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 2001
(9) Commitments and Contingencies
Other than as described within the Company's Annual Report on Form 10-K
for the year ended December 31, 2000 and the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 2001, there have been no
material developments in any of the reported legal proceedings except as
described below.
On October 12, 2000, Emergent Capital Investment Management, LLC (the
Plaintiff) 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, the Plaintiff alleges that it
is entitled to rescind the transaction because it was allegedly
represented that the size of the offering would be $20 million and the
Company actually raised $50 million. The Plaintiff seeks a return of its
$2 million purchase price of Series C stock and damages in the amount of
$1.7 million. The Company believes that is possesses meritorious defenses
to this action and has filed a motion for summary judgment which is still
pending with the court as of August 8, 2001.
After the summary judgment motion was filed, the Plaintiff filed a new
action against the Company and two of it's officers alleging different
allegations of fraud in connection with the Series C offering. In the new
complaint, the Plaintiff 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 NetValue, Inc. The Plaintiff 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 believes that the Plaintiff's
claims are either without merit or subject to the assertion of material
defenses by the Company. The Company has filed a motion to dismiss the
new complaint, which is still pending with the 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 its consolidated financial position, results of
operations or liquidity.
-10-
CAUTIONARY STATEMENT FOR FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements
within the meaning of Section 7A of the Securities Act of 1933 as amended, and
Section 21E of the Securities Exchange Act of 1934. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to known and unknown
risks, uncertainties and assumptions about us and our affiliate companies, that
may cause our actual results, levels of activity, performance or achievements to
be materially different from any future results, levels of activity, performance
or achievements 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. Factors that might cause or contribute to such a discrepancy
include, but are not limited to, those in our other Securities and Exchange
Commission filings, including our Registration Statement on Form S-3 filed on
August 10, 2001 with the SEC (File No. 333-64452) and our Annual Report on Form
10-K filed on April 2, 2001. The following discussion should be read in
conjunction with our Consolidated Financial Statements and related Notes thereto
included elsewhere in this report and in the most recent Annual Report on Form
10-K.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The principal business strategy of Stonepath Group, Inc. and
subsidiaries ("Stonepath" or the "Company") is to build a global integrated
logistics services organization by identifying, acquiring, and managing
controlling interests in profitable logistics businesses. On June 21, 2001, we
appointed Dennis Pelino as our Chairman and Chief Executive Officer to implement
this new business strategy. Mr. Pelino brings to us over 25 years of logistics
industry experience, including as President and Chief Operating Officer of Fritz
Companies, Inc. where he was employed from 1987 to 1999.
After having evaluated a number of different alternatives, we elected
to focus on the logistics industry as this industry continues to demonstrate
significant growth characteristics, is positioned for further consolidation as
many sectors of the industry remain fragmented, and is subject to enhanced
profitability through the adoption of e-commerce and other technologies.
Fundamental to our principal business strategy is the continued growth the
logistics industry demonstrates as an increasing number of businesses outsource
their supply-chain management functions in order to find cost-effective
logistics solutions. We have identified a number of companies that may be
suitable acquisition candidates. We are presently negotiating the terms of our
first acquisition. We are also in preliminary discussions with a select number
of other potential acquisition candidates.
Prior to the first quarter of 2001, our principal business strategy
focused on the development of early-stage technology businesses with significant
Internet features and applications that we refer to as our affiliate companies.
Stonepath continues to provide strategic and operational assistance to its
existing affiliate companies and provided services to six such businesses at
June 30, 2001. The following management's discussion and analysis of financial
condition and results of operations focuses primarily on our former business
strategy and will continue to do so until such time as we complete our first
acquisition under our new business strategy at which time the focus would change
to the new strategy and the results of operations of the acquisition(s).
Until we complete any acquisitions under our new business strategy, our
only revenue and losses are realized from the operating activities of our
affiliate companies accounted for under the equity method of accounting. We also
realize income from the sale of our equity interests equal to the excess of the
fair value of the proceeds received from the sale over our carrying value of the
investment at the time of disposition. The decision to sell our equity interest
in an affiliate company is based on a number of factors, including the affiliate
company's business prospects and potential and whether or not our invested
capital can be better applied to fund new acquisitions in connection with our
new business strategy. Because we acquired interests in early-stage Internet
companies, many of
-11-
which were in the development stage, we have experienced and expect to
experience, net losses as a result of these equity interests. Such losses
totaled $3.3 million and $2.7 million in the six months ended June 30, 2001 and
2000, respectively, and are reflected as "equity in losses of affiliate
companies" within our consolidated statement of operations. Also, given the
development stage of our existing affiliate companies, it is unlikely that we
will record significant revenues from their operating activities in the near
term. Rather, the income we derive, if at all, will more likely be from sales of
our interests in our affiliate companies. This occurred when we sold our
interest in College411 during fiscal 2000, and when we sold our interest in
Webmodal during the first quarter of fiscal 2001. We intend to generate revenues
under our new business strategy from our subsidiaries' operations since that
strategy entails the acquisition of controlling interests in profitable
logistics business.
Our operating expenses primarily consist of stock based compensation,
professional fees, depreciation , and salaries and benefits, which totaled
approximately $5.3 million for the first six months of fiscal 2001. However,
stock-based compensation and depreciation are non-cash charges, and in the first
two quarters of fiscal 2001 we only used cash of $1.8 million to fund our
operating expenses. We expect our operating expenses to remain at this level
until we complete our first acquisition of a controlling interest in a logistics
business.
A significant component of our fiscal 2000 results is the deemed
preferred stock dividend resulting from the issuance of our Series C Preferred
Stock. In March 2000, at the time of issuance of our Series C Preferred Stock,
the fair market value of our common stock was higher than the offering price of
our Series C Preferred Stock of $12 per share. Since our Series C Preferred
Stock was immediately convertible into shares of our common stock on a one for
one basis, this differential in price constituted a beneficial conversion
feature as defined in the relevant accounting literature and resulted in a
preferred stock dividend totaling $42.6 million. This dividend was a non cash
charge and was accompanied by a corresponding increase to additional paid in
capital thus leaving our aggregate cash and capital positions unchanged.
We have experienced, and expect to continue to experience, significant
volatility in our quarterly results due to non-recurring transactions and events
incidental to our ownership interests in and advances to affiliate companies.
These transactions include the issuance of our Series C Preferred Stock,
dispositions of, and changes to, our affiliate company ownership interests, and
impairment charges. On a continuous basis, but no less frequently than at the
end of each quarter, we evaluate the carrying value of our ownership interest in
and advances to each of our affiliate companies for possible impairment based on
achievement of business plan objectives and milestones; and, the financial
condition and prospects of the affiliate company. The business plan objectives
and milestones we consider include those related to financial performance such
as achievement of planned financial results or completion of capital raising
activities, and those that are not primarily financial in nature such as the
bringing to market of a major product or key service. If impairment is
determined, the carrying value is adjusted to fair value. The fair value of our
ownership interests in and advances to privately held affiliate companies is
generally determined based on the value at which independent third parties have
invested, or have committed to invest, in our affiliate companies.
Discontinued Operations
Our consolidated financial statements reflect the operations of Net
Value, Inc., a wholly-owned subsidiary, as a discontinued operation. This was
necessitated when, in November 1999, we made the strategic decision to exit the
development and distribution of online promotional campaign operations of Net
Value, Inc. and sold substantially all of Net Value, Inc.'s assets to
Brightstreet.com. Accordingly, the assets and liabilities of the discontinued
online promotional campaigns have been segregated from continuing operations and
reported as a separate line item in our consolidated financial statements.
-12-
Results of Operations
Three and Six Months Ended June 30, 2001 compared to the Three and Six Months
Ended June 30, 2000
We reported a net loss to common stockholders of $3.2 and $13.3 million for
the three months and six months ended June 30, 2001, ($0.15 and $0.65 per basic
and diluted common share) compared to a loss of $13.9 and $65.1 million ($0.79
and $3.94 per basic and diluted share) in the corresponding periods of the prior
year. The significant reduction in net loss to common stockholders is primarily
attributable to the deemed preferred stock dividend of $42.6 million recorded in
the first quarter of fiscal 2000 resulting from the issuance of our Series C
Preferred Stock which did not reoccur in fiscal 2001. Our operating expenses of
$2.8 million and $5.3 million for the three and six month periods ended June 30,
2001 were significantly lower than $9.8 million and $17.8 million of the
corresponding periods of the prior year largely due to the reduction of our
workforce completed in the first quarter of fiscal 2001 and associated decrease
in stock-based compensation. Our fiscal 2001 results were also positively
impacted by the sale of Webmodal and resulting $3.6 million gain. Offsetting the
reduction in operating expenses and Webmodal gain were affiliate company
impairment charges of $7.0 million and equity in losses of affiliate companies
of $3.3 million which collectively totaled $3.6 million in the corresponding
period of the prior year.
The following sections provide in greater detail the individual components
of our results of operations on a line item basis and should be read in
conjunction with our consolidated financial statements and related notes.
Stock-Based Compensation. Stock-based compensation is a non-cash expense
resulting from the amortization of deferred compensation and the issuance of
stock for services and totaled $1,413,830 and $2,648,890 for the three and six
months ended June 30, 2001, compared to $7,472,562 and $13,366,749 for the
corresponding periods in 2000. The decrease in stock-based compensation is due
to the reduction of our workforce and our advisory board, and associated
cancellation of their options resulting in a decrease to deferred compensation
and related reduction in amortization to stock-based compensation.
The following table shows the components of deferred compensation and related
amortization to stock-based compensation for the three months ended June 30,
2001:
Consultants
and Advisory
Employees Board Total
----------------- ----------------- -----------------
Balance at beginning of period $ 5,729,705 $ 17,829 $ 5,747,534
Additions to deferred compensation -- -- --
Cancellations and fair value adjustments (960,603) 17,038 (943,565)
Amortization to stock-based compensation (1,356,499) -- (1,356,499)
----------------- ---------------- ----------------
Balance at June 30, 2001 $ 3,412,603 $ 34,867 $ 3,447,470
================= ================ ================
-13-
The following table shows the components of deferred compensation and related
amortization to stock-based compensation for the six months ended June 30, 2001:
Consultants and
Employees Advisory Board Total
----------------- ----------------- ----------------
Balance at beginning of year $ 10,679,930 $ 91,794 $ 10,771,724
Additions to deferred compensation 1,207 19,450 20,657
Cancellations and fair value adjustments (4,756,332) (74,756) (4,831,088)
Amortization to stock-based compensation (2,512,202) (1,621) (2,513,823)
---------------- --------------- ---------------
Balance at June 30, 2001 $ 3,412,603 $ 34,867 $ 3,447,470
================ =============== ===============
We also recorded stock based compensation of $57,331 and $135,067 during the
three and six months ended June 30, 2001 relating to investment banking,
consulting, and legal services that were paid via the issuance of 195,000
options to purchase our common stock. We valued these equity instruments using
the Black-Scholes valuation model on the date of issuance which is when the
counterparty performance was complete.
Of the total unamortized deferred compensation relating to employees of
$3,412,603, we expect to amortize into stock-based compensation $1,242,291,
$1,411,831, $642,831, and $115,650 during the remainder of 2001, and during the
years ended December 31, 2002, 2003 and 2004, respectively. These amounts
correspond to the vesting schedule of the underlying stock-based award. The
amount of deferred compensation recorded and related amortization to stock-based
compensation will increase with any future compensatory grants and decrease with
any cancellations. All employee option grants during fiscal 2001 had exercise
prices equal to the fair value of the stock on the date of grant resulting in no
additional deferred compensation.
General and Administrative Expenses. Our general and administrative expenses
have decreased to $1,350,778 and $2,605,167 for the three and six months ended
June 30, 2001, compared to $2,313,725 and $4,417,203 for the corresponding
periods in 2000. This decrease is attributable to several factors including a
decline in the level of our investment and corporate activities thereby reducing
our professional fees and from the fiscal 2000 write-off of our goodwill arising
from the Strategicus acquisition thereby reducing depreciation and amortization.
Also contributing to the decline was the closure of our San Francisco and Boston
offices and related workforce reduction occurring in the first quarter of fiscal
2001. We expect our operating expenses to remain at this level until we complete
our first acquisition of a controlling interest in a logistics business. The
following is a schedule of the significant components that comprise general and
administrative expense:
Three months ended June 30 Six months ended June 30
--------------------------------- ---------------------------------
2001 2000 2001 2000
---------------- -------------- ---------------- -------------
Professional fees $ 576,281 $ 1,027,959 $ 1,052,605 $ 1,784,150
Salaries and benefits 413,493 669,841 888,993 1,001,986
Depreciation and amortization 33,595 340,143 73,570 663,136
Other general and administrative 327,409 275,782 589,999 967,931
--------------- ------------- ---------------- -------------
Total $ 1,350,778 $ 2,313,725 $ 2,605,167 $ 4,417,203
=============== ============= ================ =============
-14-
Interest Income and Expense. Our interest income totaled $405,304 and $849,391
for the three and six months ended June 30, 2001, compared to $703,989 and
$915,946 for the corresponding periods in 2000. Interest income consists of the
interest earned on our cash and cash equivalents, with the period over period
decrease due to lower average cash balances in fiscal 2001 than in fiscal 2000.
We incurred no interest expense in fiscal 2001 versus $10,851 and $84,627 for
the first and second quarters of fiscal 2000, respectively, with the decrease
attributable to the repayment of substantially all outstanding debt in the first
quarter of fiscal 2000.
Other Losses, Net. Other losses consists of:
------------------
Three months ended June 30 Six months ended June 30
--------------------------------- --------------------------------
2001 2000 2001 2000
---------------- --------------- --------------- ---------------
Gain on sale of Webmodal holdings $ -- $ -- $ (3,617,699) $ --
Gain on sale of College411
holdings -- (195,088) -- (195,088)
Affiliate Company impairment
charges 30,000 1,152,189 6,986,870 1,152,189
Other (1,500) -- 103,675 --
---------------- --------------- --------------- ---------------
$ 28,500 $ 957,101 $ 3,472,846 $ 957,101
================ =============== =============== ===============
In March 2001, Webmodal, previously an affiliate company, was sold to a wholly
owned subsidiary of Enron Global Markets, LLC for $6,990,532 in cash consisting
of $5,979,199 for our equity interest in Webmodal, $1,000,000 as repayment by
Webmodal of advances made by Stonepath, and $11,333 of accrued interest thereon.
The cash consideration received for our equity interest exceeded it's then
carrying value by $3,617,699 and accordingly we recorded a gain for that amount
as a result of the sale.
In May 2000, College411 was merged into a wholly owned subsidiary of Student
Advantage, Inc. whereby the College411 stockholders received .0144 shares of
Student Advantage common stock for every share of College411 common stock which
they owned on the date of the merger. As a result of this merger, we received
55,621 shares of Student Advantage's common stock. The fair market value of
Student Advantage's common stock received, based on publicly quoted market
prices, was $245,077, which exceeded the carrying value of our investment in
College411 by $195,088. Accordingly, we recorded a $195,088 gain as a result of
this transaction.
We recorded impairment charges of $6,986,870 and $1,152,189 in 2001 and 2000,
respectively, for the other than temporary decline in the fair value of four of
our Affiliate Companies. From the date of our initial acquisition of ownership
interests and subsequent advances and investments, our funding to these
Affiliate Companies represented all or a significant portion of the outside
capital the companies had available to fund their operations. In April 2001 and
June 2000, as a result of our continuous evaluation process, it was determined
that these companies were unlikely to obtain further rounds of financing
necessary to sustain operations and that substantial doubt existed over the
companies' ability to repay advances made. Accordingly, we recorded an
impairment charge to reduce the remaining carrying value of the ownership
interest in and advances to these Affiliate Companies to zero.
Equity in Losses of Affiliate Companies. Equity in losses of affiliate companies
for the three and six months ended June 30, 2001 amounted to $65,906 and
$3,301,341, respectively, compared to $2,366,906 and $2,665,756 for the
corresponding periods of the prior year. These amounts represent our
proportionate share of the losses of our affiliate companies and the
amortization of the excess of the cost of our investment over our equity
interest in the net assets of the affiliate companies accounted for under the
equity method of accounting. During the three months ended June 30, 2001, we had
only one affiliate company accounted for under the equity method compared to
five in the first three months of 2001 and six in the first six months of 2000.
Our equity in losses were highest in the first quarter of 2001 due to the
development and expansion of affiliate company operations during this period. We
expect our losses from our equity in affiliate companies to remain small as we
have only one affiliate company accounted for under the equity method. Also, we
intend to acquire controlling interests in logistics businesses for which we
would follow the consolidation method of accounting.
-15-
Discontinued Operations. The gain of $171,484 represents the settlement of
outstanding liabilities arising from the discontinued operations of Net Value,
Inc. We expect to settle the remaining liabilities on favorable terms.
Preferred Stock Dividends. The components of the preferred stock dividends are
as follows:
Three months ended June 30 Six months ended June 30
------------------------------- -----------------------------
2001 2000 2001 2000
--------------- ---------------- --------------- --------------
Series B Preferred Stock cash dividend $ -- $ -- $ -- $ 108,464
Non-cash charge: Series C Preferred
Stock dividend payable in kind 891,804 959,939 1,757,472 1,295,834
Non-cash charge: issuance of
contingent warrants -- -- 562,370 --
Non-cash charge: beneficial
conversion feature on Series C -- -- -- 42,608,327
Shares
--------------- --------------- -------------- -------------
$ 891,804 $ 959,939 $ 2,319,842 $ 44,012,625
=============== =============== ============== =============
The Series B Preferred Stock dividend was paid in cash in February 2000 as the
holders converted their Series B Shares into shares of our common stock. The
Series C Preferred Stock dividend is payable in additional Series C shares on a
quarterly basis at a deemed value of $12 per share and therefore does not
represent a cash obligation.
In February 2001 we agreed to issue warrants to purchase shares of our common
stock to the holders of our Series C Preferred Stock. As further described in
the footnotes to the consolidated financial statements, these warrants are
contingently issuable upon the satisfaction of several criteria relating to the
Series C Preferred stock including requirements over holding period, conversion,
and price. Under the relevant accounting guidance, we recorded a one-time
dividend equal to the estimated fair value of the right to receive these
contingently issuable warrants. This dividend was accompanied by a corresponding
increase to additional paid in capital thus leaving our aggregate cash and
capital position unchanged. Additionally, this dividend will not require
adjustment in the future when the amount of contingently issuable warrants are
determined and ultimately issued.
In March 2000, at the time of issuance of the Series C Shares, the then fair
market value of our common stock was higher than the Series C Shares sales price
of $12 per share. As the Series C shares are convertible into shares of our
common stock, this differential in price constitutes a beneficial conversion
feature as defined in the Emerging Issues Task Force Issue No. 98-5, "Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios" (EITF 98-5). Accordingly, we recorded $42,608,327
as additional paid in capital for the discount deemed related to a preferential
dividend for the beneficial conversion feature. In accordance with EITF 98-5,
this discount was limited to the proceeds allocated to the Series C Shares and
was recognized immediately as a preferred stock dividend as the Series C Shares
are immediately convertible. This dividend was accompanied by a corresponding
increase to additional paid in capital thus leaving our aggregate cash and
capital position unchanged.
Changes in Financial Position, Liquidity and Capital Resources
Our current operations do not generate sufficient operating funds to meet our
cash needs and, as a result, we have funded our operations with a combination of
equity and debt proceeds. We ultimately expect to fund our operations from the
cash flows of our future ownership interests in operating companies and from the
sale or cash flows of our interests in existing affiliate companies. Currently
however, our affiliate companies do not generate sufficient earnings to pay
dividends or otherwise make distributions to us. Furthermore, we do not expect
to receive such dividends within the next twelve months due to the fact that
each of our affiliate companies is in an early stage of development. Until we
receive dividends from our affiliate or operating companies or realize cash
proceeds from the
-16-
sale of interests in our affiliate companies, if at all, we will remain
dependant on our existing cash and on outside sources of capital to fund our
operations.
During the six months ended June 30, 2001, we used $1.8 million to fund our
operating expenses. As part of the reorganization we completed in the first
quarter of 2001, we moved our corporate headquarters to Philadelphia, closed our
San Francisco and Boston offices, and significantly reduced our workforce. We
expect our operating expenses to remain at this level until we complete our
first acquisition of a controlling interest in a logistics business.
In March 2001, we received $7.0 million from the sale of Webmodal consisting of
$6.0 million for our equity interest and $1.0 million as repayment of
outstanding promissory notes. During the six months ended June 30, 2001, we made
the following cash investments and advances to affiliate companies:
January 2001 Webmodal $ 500,000
February 2001 Metacat 200,000
March 2001 Seedra 22,000
April 2001 SwapIt 30,000
------------
$ 752,000
============
As of June 30, 2001, we had cash and cash equivalents of approximately $33.1
million. We believe that our cash and cash equivalents will be sufficient to
meet our operating expenses for at least the next twelve months and for the
foreseeable future. However, our long-term liquidity needs are dependant
primarily on the number of future acquisitions of controlling interests in
logistics businesses that we make and the extent to which these new acquisitions
have positive cash flows. We are presently negotiating the terms of our first
acquisition. We are also in preliminary discussions with a select number of
other potential acquisition candidates. While we have entered into active
negotiations and preliminary discussions, we are not certain that these
negotiations or discussions will lead to our acquisition of any of these
companies. In the future, we may be required to curtail or reduce the scope of
our acquisition activities to satisfy our long-term liquidity needs.
Alternatively, we would be required to seek additional funds through the sale of
our securities to outside sources of capital, which could result in substantial
dilution to stockholders. We are not certain that these funds would be available
on terms that are satisfactory to us, or at all.
Impact of Recently Issued Accounting Standards
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 and also specifies the criteria that intangible
assets acquired in a business combination must meet in order to be recognized
and reported apart from goodwill. Statement 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually in accordance with the
provisions of Statement 142. Statement 142 also requires that intangible assets
with definite useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of. We do not expect the adoption of
Statements 141 and 142 to have a material effect on our financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk relates primarily to changes in interest rates and
the resulting impact on our invested cash. We place our cash with high credit
quality financial institutions and invest that cash in short term fixed income
investments. We are averse to principal loss and ensure the safety and
preservation of our invested funds by investing in only highly rated investments
and by limiting our exposure in any one issuance. If market interest rates were
to increase immediately and uniformly by 10% from levels at June 30, 2001, the
fair value of our portfolio would decline by an immaterial amount. We do not
invest in derivative financial instruments.
-17-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Other than as described within the Company's Annual Report on Form 10-K
for the year ended December 31, 2000 and the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 2001, there have been no
material developments in any of the reported legal proceedings except as
described below.
On October 12, 2000, Emergent Capital Investment Management, LLC (the
Plaintiff) 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, the Plaintiff alleges that it
is entitled to rescind the transaction because it was allegedly
represented that the size of the offering would be $20 million and the
Company actually raised $50 million. The Plaintiff seeks a return of its
$2 million purchase price of Series C stock and damages in the amount of
$1.7 million. The Company believes that is possesses meritorious defenses
to this action and has filed a motion for summary judgment which is still
pending with the court as of August 8, 2001.
After the summary judgment motion was filed, the Plaintiff filed a new
action against the Company and two of it's officers alleging different
allegations of fraud in connection with the Series C offering. In the new
complaint, the Plaintiff 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 NetValue, Inc. The Plaintiff 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 believes that the Plaintiff's
claims are either without merit or subject to the assertion of material
defenses by the Company. The Company has filed a motion to dismiss the
new complaint, which is still pending with the court.
The Company is 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.
Item 2. Changes in Securities and Use of Proceeds
In June 2001 the Company issued options to purchase 50,000 and 20,000
shares of common stock at exercise prices of $.70 and $1.00 per share,
respectively, in connection with legal services performed by its outside
counsel. Both issuances were exempt from registration pursuant to Section
4(2) of the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
-18-
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
10.1 Amended and Restated Employment Agreement between Stonepath Group,
Inc. and Andrew P. Panzo
10.3 Agreement between Stonepath Group, Inc. and Lee Hansen effective June
22, 2001
10.44 Amended and Restated Employment Agreement between Stonepath Group,
Inc. and Stephen M. Cohen
10.61 (1) Employment Agreement between Stonepath Group, Inc. and Dennis L.
Pelino dated as of June 21, 2001
10.62 (1) Option Agreement between Stonepath Group, Inc. and Dennis L.
Pelino dated as of June 21, 2001
10.63 Options to Purchase Common Stock of Stonepath Group Inc. granted to
Andrew P. Panzo effective as of June 1, 1999
10.64 Options to Purchase Common Stock of Stonepath Group Inc. granted to
Lee Hansen effective as of June 22, 2001
----------
(1) Incorporated by reference to Registrant's Current Report on Form 8-K
dated June 21, 2001
(b) The Company filed the following Current Report on Form 8-K during the three
month period ended June 30, 2001:
(i) Current Report on Form 8-K, dated June 21, 2001.
The Company filed the foregoing report Current Report on Form
8-K reporting, under Item 5, the appointment of Dennis L.
Pelino as the Company's new Chairman of the Board and Chief
Executive Officer and the related signing of a five year
employment agreement with Mr. Pelino.
-19-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STONEPATH GROUP, INC.
Date: August 13, 2001 /s/ Dennis L. Pelino
---------------------
Dennis L. Pelino
Chief Executive Officer and
Chairman of the Board of Directors
Date: August 13, 2001 /s/ Jay Elwell
----------------
Jay Elwell
Treasurer and
Principal Accounting Officer
-20-