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, 2002
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 23,416,539 issued and outstanding shares of the registrant's common
stock, par value $.001 per share, at November 6, 2002.
STONEPATH GROUP, INC.
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2002 (Unaudited)
and December 31, 2001 ................................................1
Consolidated Statements of Operations (Unaudited)
Three and nine months ended September 30, 2002 and 2001...............2
Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, 2002 and 2001 ........................3
Notes to Consolidated Financial Statements ...........................4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .......................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk ..........22
Item 4. Controls and Procedures ............................................22
Part II. Other Information
Item 1. Legal Proceedings ...................................................23
Item 2. Changes in Securities and Use of Proceeds ...........................23
Item 3. Defaults Upon Senior Securities .....................................23
Item 4. Submission of Matters to a Vote of Security Holders .................23
Item 5. Other Information ...................................................23
Item 6. Exhibits and Reports on Form 8-K ....................................24
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
STONEPATH GROUP, INC.
Consolidated Balance Sheets
Assets September 30, 2002 December 31, 2001
------------------ -----------------
(UNAUDITED)
Current assets:
Cash and cash equivalents $ 132,804 $ 15,227,830
Accounts receivable, net 19,872,973 7,303,426
Loans receivable from related parties 133,342 64,589
Prepaid expenses 768,108 618,873
Net assets of discontinued operations 300,000 415,845
------------ ------------
Total current assets 21,207,227 23,630,563
Goodwill 20,812,114 14,437,816
Furniture and equipment, net 2,542,463 1,737,603
Acquired intangibles, net 1,869,000 970,000
Other assets 989,748 289,574
------------ ------------
$ 47,420,552 $ 41,065,556
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 10,070,213 $ 5,353,656
Accrued payroll and related expenses 787,253 1,427,315
Accrued expenses 1,490,128 1,590,272
------------ ------------
Total liabilities 12,347,594 8,371,243
------------ ------------
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares authorized;
Series C, convertible, issued and outstanding: 3,750,479 shares - 3,750
Series D, convertible, issued and outstanding: 360,745 shares
(Liquidation preference: $21,644,700 at September 30, 2002) 361 -
Common stock, $.001 par value, 100,000,000 shares authorized;
issued and outstanding: 23,380,289 shares and 20,903,110 shares,
respectively 23,380 20,903
Additional paid-in capital 196,082,638 210,730,999
Accumulated deficit (160,893,207) (177,849,701)
Deferred compensation (140,214) (211,638)
------------ ------------
Total stockholders' equity 35,072,958 32,694,313
------------ ------------
$ 47,420,552 $ 41,065,556
============ ============
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 2001 2002 2001
------------ ------------ ------------- -------------
Revenue $ 42,586,127 $ -- $ 85,780,057 $ --
Cost of purchased transportation 30,728,416 -- 60,825,185 --
------------ ------------ ------------- -------------
Net revenues 11,857,711 -- 24,954,872 --
Personnel costs 5,595,409 373,521 12,715,404 3,325,266
Other selling, general and administrative costs 3,918,930 629,655 10,410,789 1,805,295
------------ ------------ ------------- -------------
Income (loss) from operations 2,343,372 (1,003,176) 1,828,679 (5,130,561)
Other income (expense)
Interest income 9,088 326,145 82,347 1,175,536
Other income (expense) 69,855 -- 105,320 --
------------ ------------ ------------- -------------
Income (loss) from continuing operations before income taxes 2,422,315 (677,031) 2,016,346 (3,955,025)
Income taxes 80,000 -- 80,000 --
------------ ------------ ------------- -------------
Income (loss) from continuing operations 2,342,315 (677,031) 1,936,346 (3,955,025)
Discontinued operations:
Loss from discontinued operations -- (1,845,232) -- (9,574,607)
------------ ------------ ------------- -------------
Net income (loss) 2,342,315 (2,522,263) 1,936,346 (13,529,632)
Preferred stock dividends
Dividends for Series C preferred stock (173,004) (918,660) (1,952,892) (3,238,502)
Conversion from Series C to Series D 16,973,040 -- 16,973,040 --
------------ ------------ ------------- -------------
Net preferred stock dividends 16,800,036 (918,660) 15,020,148 (3,238,502)
------------ ------------ ------------- -------------
Net income (loss) attributable to common stockholders $ 19,142,351 $ (3,440,923) $ 16,956,494 $ (16,768,134)
============ ============ ============= =============
Basic net income (loss) per common share
Continuing operations $ 0.83 $ (0.08) $ 0.78 $ (0.35)
Discontinued operations -- (0.09) -- (0.47)
------------ ------------ ------------- -------------
Basic net income (loss) per common share $ 0.83 $ (0.17) $ 0.78 $ (0.82)
============ ============ ============= =============
Diluted net income (loss) per common share
Continuing operations $ 0.08 $ (0.08) $ 0.07 $ (0.35)
Discontinued operations -- (0.09) -- (0.47)
------------ ------------ ------------- -------------
Diluted net income (loss) per common share $ 0.08 $ (0.17) $ 0.07 $ (0.82)
============ ============ ============= =============
Basic weighted average common shares outstanding 23,044,277 20,480,285 21,727,030 20,463,909
============ ============ ============= =============
Diluted weighted average common shares and
common share equivalents outstanding 28,374,323 20,480,285 28,704,801 20,463,909
============ ============ ============= =============
See accompanying notes to unaudited consolidated financial statements.
2
STONEPATH GROUP, INC.
Consolidated Statements of Cash Flows
(UNAUDITED)
Nine months ended September 30,
---------------------------------
2002 2001
----------- ------------
Cash flows from operating activities:
Net income (loss) $ 1,936,346 $(13,529,632)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 715,835 107,165
Stock-based compensation - continuing operations 74,617 2,348,196
Loss on disposal of furniture and equipment 4,560 -
Discontinued operations - working capital changes and non-cash items - 8,637,031
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable (4,282,515) -
Interest receivable - 15,000
Prepaid expenses (42,771) 60,750
Other assets (84,621) (254,610)
Accounts payable and accrued expenses (2,471,152) (414,606)
----------- ------------
Net cash used in operating activities (4,149,701) (3,030,706)
----------- ------------
Cash flows from investing activities:
Purchases of businesses, net of cash received (10,065,984) -
Purchases of furniture and equipment (1,012,024) -
Proceeds from sale of furniture and equipment - 32,926
Loans made to related party (350,000) -
Discontinued operations:
Advances to affiliate companies of discontinued operations - (552,000)
Purchase of available for sale securities - (452,900)
Collections on advances to affiliate companies of
discontinued operations - 1,000,000
Acquisition of ownership interests in affiliate companies of
discontinued operations - (200,000)
Proceeds from sale of ownership interests in affiliate companies 115,000 5,979,199
----------- ------------
Net cash (used in) provided by investing activities (11,313,008) 5,807,225
----------- ------------
Cash flows from financing activities:
Issuance of common stock upon exercise of options and warrants 367,683 -
----------- ------------
Net cash provided by financing activities 367,683 -
----------- ------------
Net (decrease) increase in cash and cash equivalents (15,095,026) 2,776,519
Cash and cash equivalents at beginning of year 15,227,830 29,099,651
----------- ------------
Cash and cash equivalents at end of period $ 132,804 $ 31,876,170
=========== ============
See accompanying notes to unaudited consolidated financial statements.
3
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
September 30, 2002
(1) Nature of Operations and Basis of Presentation
Stonepath Group, Inc. and its subsidiaries (the "Company") is a non-asset based
provider of third party logistics services, offering a full range of
time-definite transportation and distribution solutions. The Company's strategic
objective is to build a leading global logistics services organization that
integrates established operating businesses and innovative technologies. The
Company plans to achieve this objective by broadening its platform of service
offerings through a combination of synergistic acquisitions and organic
expansion of its existing base of operations.
The accompanying unaudited consolidated financial statements were prepared in
accordance with accounting principles generally accepted in the United States of
America 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
unaudited consolidated financial statements reflect all adjustments, consisting
only of normal recurring accruals, necessary to present fairly the Company's
financial position, results of 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 filed with the SEC on March 29, 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.
Certain prior period amounts have been reclassified to conform to the current
presentation.
(2) Current Year Acquisitions
On April 4, 2002, the Company acquired all of the issued and outstanding common
shares of Global Transportation Services, Inc. ("Global"), a Seattle-based
provider of international air and ocean logistics services, for $5,000,000 in
cash, plus contingent consideration of up to an additional $7,000,000 payable
over five years based on Global's future financial performance. With the closing
of the transaction, the Company established its international platform for
services between the Far East, the United States and Europe. The acquisition was
accounted for as a purchase and accordingly, the results of operations and cash
flows of Global are included in the accompanying unaudited consolidated
financial statements prospectively from the date of acquisition. The total
purchase price, including acquisition expenses of $207,313 but excluding the
contingent consideration described above, was $5,207,313. The following table
summarizes the fair value of the assets acquired and liabilities assumed at
April 4, 2002 (in thousands):
Current assets $ 3,664
Furniture and equipment 169
Other assets 149
Intangible assets 550
Goodwill 3,965
----------
Total assets acquired 8,497
----------
Current liabilities 3,290
----------
Total liabilities assumed 3,290
----------
Net assets acquired $ 5,207
==========
4
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
September 30, 2002
On May 30, 2002, the Company acquired all of the issued and outstanding common
shares of United American Acquisitions and Management, Inc. d/b/a United
American Freight Services, Inc. ("United American"), a Detroit-based provider of
expedited transportation services focusing on the automotive industry. The
purchase price was valued at up to $16,100,000, consisting of cash of $5,100,000
at closing plus contingent consideration of up to an additional $11,000,000
payable over four years based on United American's future financial performance.
The acquisition was accounted for as a purchase and accordingly, the results of
operations and cash flows of United American are included in the accompanying
unaudited consolidated financial statements prospectively from the date of
acquisition. The total purchase price, including acquisition expenses of $46,465
but excluding the contingent consideration described above, was $5,146,465. The
following table summarizes the fair value of the assets acquired and liabilities
assumed at May 30, 2002 (in thousands):
Current assets $ 5,209
Furniture and equipment 161
Other assets 28
Intangible assets 500
Goodwill 2,294
----------
Total assets acquired 8,192
----------
Current liabilities 3,046
----------
Total liabilities assumed 3,046
----------
Net assets acquired $ 5,146
==========
On October 1, 2002 the Company acquired Transport Specialists, Inc. ("TSI"), a
Northern Virginia-based privately held provider of expedited domestic and
international transportation services. The TSI transaction is intended to
capitalize on TSI's existing base of government contract work in the Washington
metropolitan area and serve as a supplement to an existing Company-operated
facility in that area. The purchase price was valued at up to $1,100,000,
consisting of cash of $526,000 paid at closing, including $126,000 to retire
certain indebtedness and a three-year earn-out arrangement based upon the future
financial performance of TSI. Since this acquisition was accounted for using the
purchase method of accounting for business combinations, the results of
operations of TSI will be included in our consolidated financial statements for
the period subsequent to October 1, 2002.
(3) Discontinued Operations
From inception through the first quarter of 2001, the Company's principal
business strategy focused on the development of early-stage technology
businesses with significant Internet features and applications.
On December 28, 2001, the Board of Directors approved a plan to dispose of all
of the assets related to the Company's former business of investing in
early-stage technology companies, since these investments were incompatible with
the Company's current strategy of building a global integrated logistics
services organization. The Company intends to complete the plan within fiscal
2002. Therefore, for financial reporting purposes, the assets, liabilities,
results of operations and cash flows of the former business have been segregated
from those of the continuing operations and are presented in the Company's
unaudited consolidated financial statements as discontinued operations. The
financial statements of prior periods have been reclassified to reflect this
presentation.
On June 18, 2002, the Company sold its investment in Asset Exchange for cash of
$115,000 which approximated its carrying value.
5
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
September 30, 2002
(4) Goodwill and Other Intangible Assets - Adoption of SFAS No. 142
The following table reconciles net income (loss) and net income (loss) per share
as reflected in the accompanying unaudited consolidated financial statements to
the amounts that would have been reported had Statement of Financial Accounting
Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, been adopted
as of January 1, 2001. Such adjustments relate only to discontinued operations.
For the Three Months Ended September 30,
--------------------------------------
2002 2001
------------ --------------
Reported net income (loss) attributable to
common stockholders $ 19,142,351 $ (3,440,923)
Add back: Amortization of goodwill related to equity method
investments - 26,640
------------ --------------
Adjusted net income (loss) attributable to common stockholders $ 19,142,351 $ (3,414,283)
============ ==============
Basic net income (loss) per share:
Reported basic net income (loss) per common share $ 0.83 $ (0.17)
Goodwill amortization - -
------------ --------------
Adjusted basic net income (loss) per common share $ 0.83 $ (0.17)
============ ==============
Diluted net income (loss) per share:
Reported diluted net income (loss) per common share $ 0.08 $ (0.17)
Goodwill amortization - -
------------ --------------
Adjusted diluted net income (loss) per common share $ 0.08 $ (0.17)
============ ==============
For the Nine Months Ended September 30,
--------------------------------------
2002 2001
------------ --------------
Reported net income (loss) attributable to
common stockholders $ 16,956,494 $ (16,768,134)
Add back: Amortization of goodwill related to equity method
investments - 1,036,440
------------ --------------
Adjusted net income (loss) attributable to common stockholders $ 16,956,494 $ (15,731,694)
============ ==============
Basic net income (loss) per share:
Reported net income (loss) per common share $ 0.78 $ (0.82)
Goodwill amortization - 0.05
------------ --------------
Adjusted net income (loss) per common share $ 0.78 $ (0.77)
============ ==============
Diluted net income (loss) per share:
Reported diluted net income (loss) per common share $ 0.07 $ (0.82)
Goodwill amortization - 0.05
------------ --------------
Adjusted diluted net income (loss) per common share $ 0.07 $ (0.77)
============ ==============
6
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
September 30, 2002
(5) Commitments and Contingencies
The Company is a defendant in a number of legal proceedings, including the two
proceedings described below which are considered as "material" by the Company.
Although the Company believes that the claims asserted in these proceedings are
without merit, and it intends to vigorously defend itself against these claims,
there is the possibility that the Company could incur material expenses in the
defense and resolution of these matters.
On August 22, 2000, Austost Anstalt Schaan, Balmore Funds, S.A. and Amro
International, S.A., purchasers of the Company's convertible promissory notes,
filed suit against the Company in the United States District Court for the
District of Delaware. The plaintiffs allege that, contrary to a covenant in the
subscription agreement they executed which required the Company to "use
reasonable commercial efforts to register" the shares of its common stock
underlying the convertible promissory notes "at some future date," the Company
verbally agreed to register such shares in the first registration statement it
filed with the SEC subsequent to the transaction. The plaintiffs assert claims
for breach of contract and the duty of good faith and fair dealing, fraud,
violation of federal securities laws, estoppel, and reformation and seek damages
in excess of $20,000,000, plus attorneys' fees and costs. In response to a
motion to dismiss filed by the Company, the Court dismissed the federal
securities law and estoppel claims and denied the motion as to all other claims.
The Company believes it has meritorious defenses to the remaining claims and
intends to defend the matters vigorously.
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 $20,000,000 and the Company actually raised $50,000,000. The plaintiff
seeks a return of its $2,000,000 purchase price of Series C shares and damages
in the amount of $1,700,000. In June of 2001, the Company moved for summary
judgment in this case.
After the summary judgment motion was filed, the plaintiff 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, 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 Net
Value, Inc., a wholly owned subsidiary of the Company. 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 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 the plaintiff and dismissing the
plaintiff's second complaint for failure to state a claim upon which relief can
be granted. The Court allowed the plaintiff 20 days to file a second amended
complaint as to the second action only. On October 21, 2001, the plaintiff did
file a second amended complaint in the second action. The second amended
complaint does not raise any new factual allegations regarding plaintiff's
participation in the offering.
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 Company and its former officers. The Court refused
to grant the plaintiff an additional opportunity to re-plead its claims against
the defendants and a final order dismissing the matter has been entered. The
plaintiff thereafter filed a notice of appeal to the United States Court of
Appeals for the Second Circuit, which is currently pending. The Company believes
that it has meritorious defenses to the plaintiff's claims and intends to
vigorously defend this action.
7
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
September 30, 2002
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.
The Company may in the future incur non-cash charges to its earnings as a result
of certain modifications made to the options originally awarded to its Chief
Executive Officer on June 21, 2001. On October 5, 2001, February 28, 2002 and
July 3, 2002, the Company modified the existing option arrangements with its
Chief Executive Officer such that, effective as of July 3, 2002, vesting of the
options to purchase 1,800,000 shares of the Company's common stock was fully
accelerated. Based on the excess of the trading price of the common stock on the
dates of the modifications over the exercise price, the Company could incur a
non-cash charge to its earnings of approximately $870,000 if the Chief Executive
Officer leaves the employment of the Company prior to the vesting dates
specified in the original option grant.
(6) Preferred Stock
In March 2000, the Company completed a private placement transaction in which it
issued 4,166,667 shares of Series C Preferred Stock and warrants to purchase
416,667 additional shares of common stock for aggregate gross proceeds of
$50,000,000.
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 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 common stock at an exercise
price of $1.00 per share, and reduce from $26.58 to $1.00, the per share
exercise price of 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 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 our common
stock, were surrendered and retired in exchange for a combination of securities
consisting of:
o 1,911,071 shares of common stock;
o 1,543,413 warrants to purchase common stock at an exercise price of $1.00; and
o 360,745 shares of Series D Convertible Preferred Stock which are convertible
into 3,607,450 shares of common stock.
8
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
September 30, 2002
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 Preferred Stock are entitled
to a liquidation preference equal to $60 per share, paid prior to and in
preference to any payment made or set aside for holders of common stock, but
subordinate and subject in preference to the prior payment in full of all
amounts to which holders of other classes of 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 Preferred Stock are entitled
to participate in all liquidation distributions made to the holders of our
common stock on an as-if converted basis. The Series D Preferred Stock carries
no dividend, and, except under limited circumstances, has no voting rights
except as required by law.
Emerging Issues Task Force Topic D-42, "The Effect on the Calculation of
Earnings per Share for the Redemption or Induced Conversion of Preferred Stock",
requires that the excess of the carrying amount of preferred stock over the fair
value of the consideration transferred to the holders of the preferred stock
should be added to net earnings. The Series C Preferred Stock which was
converted into Series D Preferred Stock had a carrying value of approximately
$21,645,000. The Company obtained an independent appraisal which valued the
Series D Preferred Stock at approximately $4,672,000. Accordingly, the Company
added $16,973,000, the excess of the carrying value of the Series C Preferred
Stock over the fair value of the Series D Preferred Stock, to its 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 current cash flows of the Company.
The holders of the Series C Preferred Stock earned 162,741 and 223,011
additional shares of Series C Preferred Stock from payment of dividends during
the nine-month periods ended September 30, 2002 and 2001, respectively. No
further dividends are payable on the Series C Preferred Stock after July 18,
2002. At September 30, 2002 no shares of Series C Preferred Stock were
outstanding due to the completion of the exchange transaction.
Preferred Stock Dividends
The components of preferred stock dividends are as follows:
Three months Nine months
ended September 30, ended September 30,
-------------------------------- ------------------------------
2002 2001 2002 2001
----------- ----------- ----------- -------------
Series C Preferred Stock dividend
payable in kind $ (173,004) $ (918,660) $(1,952,892) $ (2,676,132)
Conversion from Series C
to Series D 16,973,040 - 16,973,040 -
Issuance of contingent warrants - - - (562,370)
----------- ----------- ----------- -------------
$16,800,036 $ (918,660) $15,020,148 $ (3,238,502)
=========== =========== =========== =============
The Series C Preferred Stock dividend was payable in additional shares on a
quarterly basis and therefore did not represent a cash obligation of the
Company. Subsequent to and effective with the conversion of the Series C
Preferred Stock on July 18, 2002, no further dividends will be paid on the
Series C Preferred Stock.
9
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
September 30, 2002
(7) Revolving Credit Facility
To ensure adequate financial flexibility, in May 2002, the Company secured a
$15,000,000 revolving credit facility (the "Facility") collateralized by the
accounts receivable and the other assets of the Company and its subsidiaries.
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. The Company expects that the cash flow from operations of
the subsidiaries will be sufficient to support the corporate overhead of
Stonepath and some portion, if not all, of the contingent earn-out payments and
other cash requirements associated with the acquisitions. Therefore, it is
anticipated that the 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. At September 30, 2002,
based on available collateral and outstanding letter of credit commitments,
there was $14,840,000 available for borrowing under the Facility.
(8) Deferred Compensation
The components of deferred compensation are as follows:
Balance at January 1, 2002 $211,638
Additions to deferred compensation 3,193
Amortization to stock-based compensation (74,617)
--------
Balance at September 30, 2002 $140,214
========
Stock-based compensation is reflected in the accompanying unaudited consolidated
financial statements as follows:
Three months Nine months
ended September 30, ended September 30,
----------------------------- ------------------------------
2002 2001 2002 2001
--------- ---------- --------- -----------
Personnel costs $ 26,335 $ 192,321 $ 74,617 $ 2,348,196
Loss from discontinued
operations - 528,195 - 1,021,210
--------- ---------- --------- -----------
Total $ 26,335 $ 720,516 $ 74,617 $ 3,369,406
========= ========== ========= ===========
10
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
September 30, 2002
(9) Stock Options
On July 3, 2002, the Company issued options to purchase 2,500,000 shares of its
common stock at an exercise price of $1.30 per share which represented a 20%
premium over the quoted market price of $1.08 on the date of grant.
On September 5, 2002, the Company issued options to purchase 613,000 shares of
its common stock at an exercise price of $1.30 per share which represented a 15%
premium over the quoted market price of $1.13 on the date of grant.
(10) Income (Loss) per Common Share
Net income (loss) per common share is calculated in accordance with SFAS No.
128, "Earnings Per Share" which requires presentation of basic net income (loss)
per common share and diluted net income (loss) per common share. Basic net
income (loss) per common share excludes dilution and is computed by dividing net
income (loss) attributable to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted net income (loss) per
common share is computed in the same manner as basic net income (loss) per
common share after assuming issuance of common stock for all potentially
dilutive equivalent shares, which includes (1) stock options and warrants (using
the treasury stock method) and (2) shares of our convertible preferred stock,
after eliminating preferred dividends from net income (loss) attributable to
common stockholders. Anti-dilutive instruments are not considered in this
calculation. Options and warrants to purchase 5,084,796 shares of common stock
at a range of $1.21 to $17.50 were outstanding during the three months ended
September 30, 2002 but were excluded from the computation of diluted net income
per common share because the exercise prices exceeded the average market price
of the common stock during the period. Options and warrants to purchase
1,786,796 shares of common stock at a range of $1.69 to $17.50 were outstanding
during the nine months ended September 30, 2002 but were excluded from the
computation of diluted net income per common share because the exercise prices
exceeded the average market price of common stock during the period. For the
three- and nine-month periods ended September 30, 2001, the effect of the stock
options, warrants and convertible preferred stock amounting to 16,278,700
shares, was anti-dilutive in the calculation of the net loss per common share.
(11) Segment Information
The following table provides selected historical financial information for the
Company's business segments. Prior to April 4, 2002, the Company operated solely
in the domestic segment.
UNAUDITED
----------------------------------------------------------------------------
Domestic International Parent Consolidated
---------- --------------- -------- --------------
(In thousands)
Three months ended September 30, 2002:
Revenues $ 20,342 $ 22,244 $ - $ 42,586
======== ======== ======== ========
Net revenues 7,280 4,578 - 11,858
======== ======== ======== ========
Income (loss) from operations 1,161 1,502 (320) 2,343
======== ======== ======== ========
Net income (loss) 1,151 1,503 (312) 2,342
======== ======== ======== ========
Nine months ended September 30, 2002:
Revenues $ 47,098 $ 38,682 $ - $ 85,780
======== ======== ======== ========
Net revenues 17,235 7,720 - 24,955
======== ======== ======== ========
Income (loss) from operations 1,127 1,889 (1,187) 1,829
======== ======== ======== ========
Net income (loss) 1,119 1,890 (1,073) 1,936
======== ======== ======== ========
Total assets:
September 30, 2002 $ 16,811 $ 6,852 $ 23,758 $ 47,421
======== ======== ======== ========
Parent total assets consist primarily of goodwill arising from our acquisitions.
Such goodwill has not yet been pushed down to the Company's operating units.
11
The following table provides selected pro forma financial information for the
Company's business segments. Information with respect to the Company's results
from continuing operations is presented on a pro forma basis as if the
acquisitions of M.G.R., Inc., d/b/a Air Plus (acquired on October 4, 2001),
Global and United American had all occurred on January 1, 2001. The pro forma
information is not necessarily indicative of the results that would have
occurred if the transactions had occurred on January 1, 2001.
UNAUDITED
----------------------------------------------------------------------------
Domestic International Parent Consolidated
---------- --------------- -------- --------------
(In thousands)
Three months ended September 30, 2002 (pro forma):
Revenues $ 20,342 $ 22,244 $ - $ 42,586
======== ======== ======== ========
Net revenues 7,280 4,578 - 11,858
======== ======== ======== ========
Income (loss) from operations 1,161 1,502 (320) 2,343
======== ======== ======== ========
Net income (loss) 1,151 1,503 (312) 2,342
======== ======== ======== ========
Three months ended September 30, 2001 (pro forma):
Revenues $ 15,569 $ 16,313 $ - $ 31,882
======== ======== ======== ========
Net revenues 6,741 2,999 - 9,740
======== ======== ======== ========
Income (loss) from operations 776 390 (238) 928
======== ======== ======== ========
Net income (loss) 369 393 (238) 524
======== ======== ======== ========
Nine months ended September 30, 2002 (pro forma):
Revenues $ 57,185 $ 51,424 $ - $108,609
======== ======== ======== ========
Net revenues 18,442 11,238 - 29,680
======== ======== ======== ========
Income (loss) from operations 1,935 2,933 (762) 4,106
======== ======== ======== ========
Net income (loss) 1,710 2,936 (641) 4,005
======== ======== ======== ========
Nine months ended September 30, 2001 (pro forma):
Revenues $ 50,493 $ 42,573 $ - $ 93,066
======== ======== ======== ========
Net revenues 18,271 8,196 - 26,467
======== ======== ======== ========
Income (loss) from operations 1,322 542 (2,836) (972)
======== ======== ======== ========
Net income (loss) 886 549 (2,836) (1,401)
======== ======== ======== ========
Total assets:
September 30, 2002 $ 16,811 $ 6,852 $ 23,758 $ 47,421
======== ======== ======== ========
12
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
revenues consistent with recent results, (ii) our ability to sustain our recent
profitability by maintaining overall 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 or exercise
of outstanding convertible securities, (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, such as those recently experienced
on the West Coast of the United States, and (xv) other factors which are or may
be identified from time to time in our Securities and Exchange Commission
filings and other public announcements, including our Annual Report on Form 10-K
filed on March 29, 2002 and our Registration Statement on Form S-3 (Registration
No. 333-91240). We have assumed, for the purpose of our forward-looking
statements, that each of our operating companies will achieve, on a stand-alone
basis, that level of net income necessary to fully achieve the earn-out payments
under its acquisition agreement. 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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
We are a non-asset based provider of third-party logistics services, offering a
full range of time-definite transportation and distribution solutions. We manage
and arrange the domestic and international movement of raw materials, supplies,
components and finished goods for our customers as their outsourced logistics
solution. These services are offered through our domestic and international air
and ground freight forwarding business. In addition to our time-definite
transportation services, we also provide a broad range of value added supply
chain management services including customs brokerage, warehousing, order
fulfillment and inventory management. We service a customer base of
manufacturers, distributors and national retail chains through a network of
offices in 19 major metropolitan areas in North America including Puerto Rico
and an extensive network of over 200 independent carriers. Through our
international platform, we manage our customers' supply chains through Global
Transportation Services, Inc. ("Global") with headquarters in Seattle, and
additional logistics centers in Los Angeles, Chicago, New York, Miami, and
Minneapolis, and through an array of international agent partners.
13
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 platform of
service offerings 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, 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, 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 organic organizational growth. The
business risks associated with these factors are identified or referred to above
under our "Cautionary Statement for Forward-Looking Statements".
On October 5, 2001, we acquired Air Plus Limited ("Air Plus"), a group of
Minneapolis-based privately held companies that provide a full range of
logistics and transportation services. The Air Plus acquisition established our
domestic logistics platform. The total value of the transaction was $34.5
million, consisting of cash of $17.5 million paid at closing and a four-year
earn-out arrangement based on the future financial performance of Air Plus.
Since this acquisition was accounted for using the purchase method of accounting
for business combinations, our financial statements for the year ended December
31, 2001 included the results of operations of Air Plus for the period from
October 5, 2001 through December 31, 2001.
On April 4, 2002, we acquired Global, a Seattle-based privately held company
that provides a full range of international air and ocean logistics services.
The Global acquisition established our international logistics platform. The
total value of the transaction was $12.0 million, consisting of cash of $5.0
million paid at closing and up to an additional $7.0 million payable over a
five-year earn-out period based upon the future financial performance of Global.
Since this acquisition was accounted for using the purchase method of accounting
for business combinations, the results of operations of Global are included in
our unaudited consolidated financial statements for the period subsequent to
April 4, 2002.
On May 30, 2002 we acquired United American Freight Services, Inc. ("United
American"), a Detroit-based privately held provider of expedited transportation
services. The United American transaction provides 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. Since this acquisition was accounted for using the purchase
method of accounting for business combinations, the results of operations of
United American are included in our unaudited consolidated financial statements
for the period subsequent to May 30, 2002.
14
On October 1, 2002 we acquired Transport Specialists, Inc. ("TSI"), a Northern
Virginia-based privately held provider of expedited domestic and international
transportation services. The TSI transaction is intended to capitalize on TSI's
existing base of government contract work in the Washington metropolitan area
and serve as a supplement to an existing Company-operated facility in that area.
The purchase price was valued at up to $1.1 million, consisting of cash of
$526,000 paid at closing, including $126,000 to retire certain indebtedness, and
a three-year earn-out arrangement based upon the future financial performance of
TSI. Since this acquisition was accounted for using the purchase method of
accounting for business combinations, the results of operations of TSI will be
included in our consolidated financial statements for the period subsequent to
October 1, 2002.
We have also identified a number of additional companies that may be suitable
acquisition candidates and are in preliminary discussions with a select number
of them. However, there can be no assurance that any of these acquisitions will
be completed.
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 fourth day
delivery), special handling needs (heavy equipment, delicate items,
environmentally sensitive goods, electronic components, etc.) and the means of
transport (truck, rail, air or ocean). In turn, we assume the responsibility for
arranging, and the cost of, the underlying means of transportation.
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 gross revenue, as it relates to our freight forwarding services, includes
the rate charged to our customers for the movement of their freight. Our net
revenue is the difference between the rate charged to our customers and our
direct cost of transportation. With respect to freight forwarding services,
gross revenues and applicable costs are recognized upon delivery.
We also provide a range of other services, such as customs brokerage,
warehousing services, customized distribution and inventory management services,
fulfillment services and other specific supply chain solutions. Our gross
revenue in these situations is recognized upon performance.
Management believes that net revenues are also an important measure of economic
performance in that they provide for a comparison between the Company's
transportation-based revenues and fee-based activities. Net revenues represent
the Company's fee-based activities, after giving effect to the cost of purchased
transportation. In addition, management believes measuring its operating costs
as a function of net revenues provides a useful metric as the Company's ability
to control costs as a function of net revenues directly impacts operating
earnings. With respect to the Company's services other than freight
transportation, net revenues are identical to revenues.
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. This trend is
dependent on numerous factors, including the markets in which we operate,
holiday seasons, consumer demand and economic conditions. Since our revenues are
largely derived from customers whose shipments are dependent upon consumer
demand and just-in-time production schedules, the timing of our revenues are
often out of our control. Factors such as shifting demand for retail goods
and/or manufacturing production delays, could unexpectedly affect the timing of
our revenues. 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.
15
Critical Accounting Policies
Accounting policies, methods and estimates are an integral part of the unaudited
consolidated financial statements prepared by management and are based upon
management's current judgments. Those judgments are normally based on knowledge
and experience with regard to past and current events and assumptions about
future events. Critical accounting policies are defined as those that are
reflective of significant judgments and uncertainties, and potentially result in
materially different results under different assumptions and conditions. The
Company believes areas that are particularly significant include the assessment
of the recoverability of long-lived assets, specifically goodwill and acquired
intangibles, and the establishment of the allowance for doubtful accounts.
Goodwill arising from our acquisitions is not amortized, but instead will be
tested for impairment at least annually in accordance with the provisions of
SFAS No. 142. In addition, acquired intangibles arising from those transactions
are amortized and reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. The recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the asset to future net undiscounted cash
flows expected to be generated by the asset. The Company cannot guarantee that
there will not be impairments in future periods.
The Company maintains reserves for specific and general allowances against
accounts receivable. The specific reserves are established on a case-by-case
basis by management and the credit manager. A general reserve is established for
all other accounts receivable, based on a specified percentage of the accounts
receivable balance. Management continually assesses the adequacy of the recorded
allowance for doubtful accounts, based on its knowledge concerning the customer
base. While credit losses have historically been within the Company's
expectations and the provisions established, the Company cannot guarantee that
it will continue to experience the same credit loss rates that it has in the
past.
Discontinued Operations
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. Largely as a result of the significant correction in
the global stock markets which began during 2000, and the corresponding decrease
in the valuation of technology businesses and contraction in the availability of
venture financing during 2001, we elected to shift our business strategy to
focus on the acquisition of operating businesses within a particular industry
segment. Beginning in the second quarter of 2001, we focused our acquisition
efforts specifically within the transportation and logistics industry.
This decision occurred in conjunction with our June 21, 2001 appointment of
Dennis L. Pelino as our Chairman and Chief Executive Officer. Mr. Pelino brings
to us over 25 years of logistics experience, including as President and Chief
Operating Officer of Fritz Companies, Inc., where he was employed from 1987 to
1999.
Results of Operations
Basis of Presentation
The following analysis of our results of operations discusses only our ongoing
operations due to the significant change in our business. Accordingly, no
comparative analysis has been presented for the historical periods ended
September 30, 2001, as it would provide no meaningful data with respect to
ongoing operations.
16
Results of Operations - Actual
Revenues for the third quarter were $42.6 million, with net income of $2.3
million, which reflects the operations of Air Plus, Global and United American
for the entire period. Net income reported above does not include a non-cash net
benefit of $16.8 million associated with the restructuring of the Series C
preferred stock, after giving effect to $173,000 in preferred stock dividends.
Net revenues for the third quarter were $11.9 million. Revenues for the nine
months ended September 30, 2002 were $85.8 million, with net income of $1.9
million, which reflects the operations of Air Plus for the full fiscal period,
Global for six months and United American for four months. Net income reported
above does not include a non-cash net benefit of $15.0 million associated with
the restructuring of the Series C preferred stock, after giving effect to the
$2.0 million in preferred stock dividends. Net revenues for the nine months
ended September 30, 2002 were $25.0 million.
Personnel costs represent 47.2% and 51.0% of net revenues for the three months
and nine months ended September 30, 2002, respectively. Management anticipates
further improvements in these percentage relationships as the Company expands
its services through acquisitions and organic growth.
Other selling, general and administrative costs represent 33.0% and 41.7% of net
revenues for the three months and nine months ended September 30, 2002,
respectively. Although the absolute dollar amounts may increase in the future as
we acquire additional companies and grow internally, management expects the
percentage relationship to continue to improve as we aggressively manage our
operating costs.
Results of Operations - Pro Forma
The following tables show the unaudited pro forma consolidated gross and net
revenues attributable to the Company's principal services and the Company's
unaudited pro forma consolidated operating expenses for the three- and
nine-month periods ended September 30, 2002 and 2001, expressed as percentages
of net revenues. These pro forma analyses are presented as if we had
discontinued our former business model and acquired Air Plus, Global and United
American as of January 1, 2001. The pro forma results reflect the combination of
the historical results of operations of Air Plus, Global, United American and
Stonepath as adjusted to reflect contractual adjustments of officers'
compensation at the acquired companies, to reflect amortization of acquired
intangibles and to reflect a reduction in investment income due to lower cash
balances as a result of the acquisitions. The pro forma results exclude losses
associated with the discontinued operations of Stonepath.
Pro Forma (dollars in thousands)
-----------------------------------------------------------------------------------------------------
(UNAUDITED)
Three months ended September 30, Nine months ended September 30,
----------------------------------------------- --------------------------------------------------
2002 2001 2002 2001
---------------------- ---------------------- ----------------------- -----------------------
Percent of Percent of Percent of Percent of
Amount revenue Amount revenue Amount revenue Amount revenue
Revenues $ 42,586 100.0% $ 31,882 100.0% $ 108,608 100.0% $ 93,066 100.0%
Cost of purchased
transportation 30,728 72.2% 22,142 69.4% 78,928 72.7% 66,599 71.6%
-------- ------ -------- ---- --------- ------ -------- ----
Net revenues $ 11,858 27.8% $ 9,740 30.6% $ 29,680 27.3% $ 26,467 28.4%
======== ====== ======== ==== ========= ====== ======== ====
Pro Forma (dollars in thousands)
-----------------------------------------------------------------------------------------------------
(UNAUDITED)
Three months ended September 30, Nine months ended September 30,
----------------------------------------------- --------------------------------------------------
2002 2001 2002 2001
---------------------- ---------------------- ----------------------- -----------------------
Percent of Percent of Percent of Percent of
net net net net
Amount revenue Amount revenue Amount revenue Amount revenue
Net revenues $ 11,858 100.0% $ 9,740 100.0% $ 29,680 100.0% $ 26,467 100.0%
Personnel costs 5,595 47.2% 4,635 47.6% 14,285 48.1% 14,786 55.9%
Other selling,
general and
administrative costs 3,919 33.0% 4,176 42.9% 11,289 38.0% 12,653 47.8%
-------- ------ -------- ------ --------- ------ -------- ------
Income (loss) from
operations 2,344 19.8% 929 9.5% 4,106 13.8% (972) (3.7%)
Other income (expense)
Interest income 9 0.1% 11 0.1% 9 0.0% (4) -
Other income (expense) 69 0.6% (415) (4.3%) 46 0.2% (425) (1.6%)
-------- ------ -------- ----- --------- ------ -------- ------
Income (loss) before
income taxes 2,422 20.4% 525 5.4% 4,161 14.0% (1,401) (5.3%)
Income taxes 80 0.7% - 0.0% 156 0.5% - -
-------- ------ -------- ------ --------- ------ -------- ------
Net income (loss) $ 2,342 19.8% $ 525 5.4% $ 4,005 13.5% $ (1,401) (5.3%)
======== ====== ======== ====== ========= ====== ======== ======
17
Pro forma gross revenues increased 33.6% and 16.7% for the three- and nine-month
periods ended September 30, 2002, respectively, compared with the same periods
in 2001. For the three-month periods ended September 30, 2002 and 2001,
purchased transportation margins were 27.8% and 30.6%, respectively and for the
nine-month periods purchased transportation margins were 27.3% and 28.4%,
respectively.
Pro forma net revenues increased 21.7% and 12.1% for the three- and nine-month
periods ended September 30, 2002, respectively, compared with the same periods
in 2001. For the third quarter, the Company's pro forma net revenue growth was
driven by an increase of $1.6 million, or 74.6%, from its international
operations as compared with the pro forma three-month period ended September 30,
2001. For the nine months ended September 30, 2002, the Company's international
platform delivered $3.0 million or 95% of the pro forma net revenue growth, as
compared with the same period in 2001, with domestic operations accounting for
the balance.
Pro forma personnel costs increased 20.7% during the three-month period ended
September 30, 2002 compared to the same period in 2001 due to increases in sales
and staffing of six new terminals. Pro forma personnel costs decreased 3.4%
during the nine-month period ended September 30, 2002 compared to the same
period in 2001 due to reductions in stock-based compensation offset by increased
staffing at six new terminals. Personnel costs as a percentage of net revenues
decreased 0.4% and 7.8% for the three- and nine-month periods ended September
30, 2002, respectively, as compared with the same periods in 2001. The reduced
salaries as a percentage of net revenues reflect the significant reductions in
stock-based compensation with current year costs coming more in line with our
expected spending levels.
Other selling, general and administrative costs decreased 6.2% and 10.8% for the
three- and nine-month periods ended September 30, 2002, respectively, as
compared with the same periods in 2001. The decreases noted were primarily
attributed to reductions in the Company's purchase of outside services and
administrative costs at our international operation. Other selling, general and
administrative costs as a percentage of net revenues decreased 9.9% and 9.8% for
the three- and nine-month periods ended September 30, 2002, respectively, as
compared with the same periods in 2001, as the Company leveraged net revenue
increases over other operating expenses.
Other income, net, increased for the three- and nine-month periods ended
September 30, 2002, as compared with the same periods in 2001, principally due
to lower interest income on lower average cash balances during the periods.
Financial Outlook
Through our acquisitions of Air Plus and Global, we accomplished the first step
in establishing our domestic and international service platforms. Our
acquisitions of United American and TSI are examples of the types of synergistic
"add-on" acquisition we envision in our acquisition strategy. They are intended
to complement and enhance our existing services through new geographic markets,
expansion of our services and a broadened client base.
Management estimates that the Company's net income for 2002 will be
approximately $3.5 million on an estimated $125.0 million in revenues. For 2003
management estimates that the Company's net income will be in the $7.0-$8.0
million range on an estimated $180.0 million in revenues. 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 remain at least at current levels; (iii) that no material economic
or customer disruptions will occur; (iv)that each of our operating companies on
a stand-alone basis will deliver the level of pre-tax operating income necessary
to fully achieve the earn-out payments under each of their acquisition
agreements; and (v) that the risks otherwise identified or referred to in our
"Cautionary Statement for Forward-Looking Statements" will not have an adverse
effect on operations.
Notwithstanding our expectations regarding our operating companies, 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.
Readers are cautioned not to place undue reliance on these forward-looking
statements. Furthermore, even though we believe these companies will achieve a
certain level of earnings on an annual basis, their results are subject to
seasonal trends and general economic conditions. Historically, the results of
these companies have been seasonal with their first quarter results lower than
other quarters. Thereafter, volume and income has accelerated for the remainder
of the year, with the third and fourth quarters showing the greatest
improvement.
18
Changes in Financial Position, Liquidity and Capital Resources
Prior to the adoption of our current business model, our operations consisted of
the development of early-stage technology businesses. Those 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 subsidiaries we acquire.
Our funding needs during the past two years have been provided by the proceeds
from the sale of 4,166,667 shares of our Series C Preferred Stock (sold as a
unit with warrants to purchase 416,667 shares of our common stock) completed
during March 2000. This offering yielded net proceeds of $48.3 million for the
Company, after the payment of offering costs.
The terms of our Series C Preferred Stock initially required us to use the
proceeds from that offering solely for investments in early stage Internet
companies. In February 2001, we received consents from the holders of more than
two-thirds of our issued and outstanding shares of Series C Preferred Stock to
modify this restriction to permit us to use the proceeds to make any investments
in the ordinary course of our business, as from time-to-time determined by our
Board of Directors, or for any other business purpose approved by our Board of
Directors.
In exchange for these consents, we agreed to a private exchange transaction in
which we would issue to the holders of our 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 our Common Stock at an exercise price of $1.00
per share, and reduce from $26.58 to $1.00, the per share exercise price of
307,806 existing warrants owned by the holders of our 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 our common stock.
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), we expanded the exchange transaction to include an
additional alternative. We provided holders of our Series C Preferred Stock as
of the conversion date 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 our Series C
Preferred Stock, as of July 19, 2002, all of the Company's shares of Series C
Preferred Stock, representing approximately $44.6 million in liquidation
preferences, together with warrants to purchase 149,457 shares of our common
stock, were surrendered and retired in exchange for a combination of securities
consisting of:
o 1,911,071 shares of common stock;
o 1,543,413 warrants to purchase common stock at an exercise price
of $1.00; and
o 360,745 shares of Series D Convertible Preferred Stock which are
convertible into 3,607,450 shares of common stock.
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 Preferred Stock are entitled
to a liquidation preference equal to $60 per share, paid prior to and in
preference to any payment made or set aside for holders of common stock, but
subordinate and subject in preference to the prior payment in full of all
amounts to which holders of other classes of 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 Preferred Stock are entitled
to participate in all liquidation distributions made to the holders of our
common stock on an as-if converted basis. The Series D Preferred Stock carries
no dividend, and, except under limited circumstances, has no voting rights
except as required by law.
19
Emerging Issues Task Force Topic D-42, "The Effect on the Calculation of
Earnings per Share for the Redemption or Induced Conversion of Preferred Stock",
requires that the excess of the carrying amount of preferred stock over the fair
value of the consideration transferred to the holders of the preferred stock
should be added to net earnings. The Series C Preferred Stock which was
converted into Series D Preferred Stock had a carrying value of approximately
$21.6 million. The Company obtained an independent appraisal which valued the
Series D Preferred Stock at approximately $4.7 million. Accordingly, the Company
added $16.9 million, the excess of the carrying value of the Series C Preferred
Stock over the fair value of the Series D Preferred Stock, to its 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 current cash flows of the Company.
During the nine-month periods ended September 30, 2002 and 2001, the holders of
the Series C Preferred Stock earned 162,741 and 223,011 shares from payment of
dividends, respectively. No further dividends are payable on the Series C
Preferred Stock after July 18, 2002. At September 30, 2002 no shares of Series C
Preferred Stock were outstanding due to the completion of the exchange
transaction.
We have 23.4 million shares of common stock outstanding and 39.6 million fully
diluted shares outstanding. We build to our fully diluted share count as
follows: 23.4 million shares of common stock outstanding, 3.6 million shares of
common stock related to the Series D Preferred Stock, 3.2 million shares of
common stock issuable upon exercise of investment-related warrants and 9.4
million shares of common stock issuable upon exercise of employee stock options.
If all the warrants and options were exercised, the Company would receive $21.9
million in proceeds. If we were to exclude those warrants and options that have
a strike price of $5 or greater, the fully diluted shares outstanding would be
38.5 million shares and proceeds on exercise would be reduced to $12.5 million.
During 2002, before changes in working capital, the Company generated positive
cash from operating activities. With changes in working capital, the Company had
a net use of cash from operations of $4.1 million.
The Company's cash and cash equivalents were $0.1 million at September 30, 2002,
as compared to $15.2 million at December 31, 2001. The Company's working capital
was $9.1 million at September 30, 2002, as compared to $15.3 million at December
31, 2001. The decrease in cash and working capital is principally attributable
to the acquisitions of Global and United American and the cash used in
operations.
Through its investing activities, the Company spent $5.0 million for the
acquisition of Global on April 4, 2002 and $5.1 million for the acquisition of
United American on May 30, 2002. On October 1, 2002, the Company acquired TSI
for $0.5 million from available cash resources.
To ensure adequate financial flexibility, in May 2002 we secured a $15.0 million
revolving credit facility (the "Facility") collateralized by the accounts
receivable and the other assets of the Company and its subsidiaries. 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 Stonepath
and some portion, if not all, 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. At September 30, 2002, based on
available collateral and outstanding letter of credit commitments, there was
$14.8 million available for borrowing under our Facility.
20
The Company believes that its current working capital and anticipated cash flow
from operations will be adequate to fund operations for the near term. However,
the Company's aggressive acquisition strategy will require additional financing
in the near term. The Company intends to finance its future acquisitions
primarily through the use of cash, funds from the Facility, and shares of its
common stock or other securities. In the event that the Company's common stock
does not attain or maintain a sufficient market value or potential acquisition
candidates are otherwise unwilling to accept the Company's securities as part of
the purchase price for the sale of their businesses, the Company may be required
to utilize more of its cash resources or debt financing in order to continue its
acquisition program. While it is impossible to predict market prices, the recent
conversion of our Series C Preferred Stock could cause downward pressure on the
trading price of our common shares should a number of the former holders thereof
seek to sell a large number of common shares that are not otherwise adequately
absorbed by the normal trading level of our shares. If the Company does not have
sufficient cash resources through either operations or from debt facilities, its
growth would be limited.
We will be required to make significant capital payments in the future if the
earn-out installments under our various acquisitions become due. While we
believe that a significant portion of the required capital will be generated by
the acquired companies, we may have to secure additional sources of capital to
fund some portion of the earn-out payments as they become due. This presents us
with certain business risks relative to 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
up to $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, each installment payable in full if Air Plus achieves
pre-tax income of $6.0 million in each of the twelve-month periods preceding the
year of payment. However, the 2003 installment will be based on pre-tax income
of $6.0 million achieved during the 15 month period from October 1, 2001 through
December 31, 2002. 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.
The acquisition of Global was completed subject to an earn-out arrangement of up
to $7.0 million. We agreed to pay the former Global shareholders a base earn-out
amount of $1.0 million per year for the five year period following closing, with
each installment payable in full if Global achieves pre-tax income of $2.0
million in each of the years during the earn-out period. In the event there is a
shortfall in Global's pre-tax income, the earn-out payment will be reduced on a
pro rata basis by the percentage shortfall. Shortfalls may be carried over or
back to the extent that pre-tax income in any other pay-out period exceeds the
$2.0 million level. In addition to the base earn-out amount, we also agreed to
pay the former Global shareholders an additional earn-out payment in an amount
equal to 40% of the amount by which Global's cumulative pre-tax income over the
course of the earn-out period exceeds $10.0 million, with such payment not to
exceed $2.0 million.
The acquisition of United American was completed subject to an earn-out
arrangement of up to $11.0 million. We agreed to pay the former United American
shareholder a base earn-out amount of $1.25 million per year for four years
following closing, with each installment payable in full if United American
achieves pre-tax income of $2.2 million in each of the years during the earn-out
period. In the event there is a shortfall in United American's pre-tax income,
the earn-out payment 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 income in any other year of the earn-out period exceeds the $2.2 million
level. In addition to the base earn-out amount, we also agreed to pay the former
United American shareholder an additional annual earn-out payment in an amount
equal to one-half of the amount by which United American's annual pre-tax income
exceeds $2.2 million during the earn-out period, with such payments not to
exceed $6.0 million.
The acquisition of TSI was completed subject to an earn-out arrangement of up to
$600,000. We agreed to pay the former TSI shareholder an earn-out payment of
$200,000 per year for three years following closing, with each installment
payable in full if TSI achieves net revenue (gross revenues less cost of
purchased transportation) of $1.62 million in each of the years during the
earn-out period. In the event there is a shortfall in TSI's net revenue, the
earn-out payment will be reduced by the pro-rata amount of such shortfall, and
the TSI shareholder will be able to recover any such shortfalls to the extent
that cumulative net revenues of TSI during the earn-out period exceed $4.8
million.
21
The following table details the Company's required annual payments assuming that
the base earn-out levels are achieved:
April 1, 2003 $ 5,000,000
2004 7,250,000
2005 7,250,000
2006 6,250,000
2007 1,000,000
2008 250,000
-----------
$27,000,000
===========
The Company is a defendant in a number of legal proceedings. Although we believe
that the claims asserted in these proceedings are without merit, and we intend
to vigorously defend these matters, there is the possibility that the Company
could incur material expenses in the defense and resolution of these matters.
Furthermore, since the Company has not established any reserves in connection
with such claims, any such liability 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We do not use derivative financial instruments in our investment portfolio. We
invest our excess cash in institutional money market accounts.
Investments in both fixed rate and floating rate interest earning instruments
carry a degree of interest rate risk. Fixed rate securities may have their fair
market value adversely impacted due to a rise in interest rates, while floating
rate securities may produce less income than expected if interest rates fall.
Due in part to these factors, our future investment income may fall short of
expectations due to changes in interest rates or it may suffer losses in
principal if forced to sell securities which have declined in market value due
to changes in interest rates. If market interest rates were to change by 10%
from the levels at December 31, 2001, the fair value of our portfolio would be
impacted by an immaterial amount.
Item 4. Controls and Procedures
Within 90 days prior to the filing date of this report, our management conducted
an evaluation, under the supervision and with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in timely alerting
them to material information required to be included in the our periodic SEC
reports.
In addition, since the date of our evaluation, there have been no significant
changes in our internal controls or in other factors that could significantly
affect those controls.
22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Other than as described in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001, and as updated by the description in the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, there have
been no material developments in any of the reported legal proceedings.
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
During the quarter ended September 30, 2002, we completed a private exchange
transaction resulting in the restructuring of our outstanding shares of Series C
Preferred Stock. In the restructuring, effective as of July 19, 2002, all of the
Company's shares of Series C Preferred Stock, representing approximately $44.6
million in liquidation preferences, were surrendered and retired in exchange for
a combination of securities consisting of (i) 1,911,071 shares of our common
stock upon conversion of the Series C Preferred Stock; (ii) contingent warrants
to purchase 1,543,413 shares of common stock at an exercise price of $1.00
through July 18, 2005 (including an amendment to the 158,348 Series C warrants
that were originally granted in March 2000 for the purpose of reducing the
exercise price thereof from $26.58 to $1.00 per share and extending the exercise
period from March 2003 to July 18, 2005); and (iii) 360,745 shares of a newly
designated class of Series D Convertible Preferred Stock which in the future are
convertible into 3,607,450 shares of the our common stock.
Each holder of our Series D Convertible Preferred Stock has the right to convert
at any time all or a portion of his Series D Convertible Preferred Stock into
ten (10) shares of Common Stock for each share of Series D Convertible Preferred
Stock converted, subject to certain anti-dilution adjustments. Any shares of
Series D Convertible Preferred Stock that are outstanding after December 31,
2004 will automatically be converted into common stock. Automatic conversion
will also occur: (i) once the average closing price of our common stock is over
$7.50 for thirty (30) consecutive trading days; (ii) upon a merger or sale
transaction after December 31, 2003, unless the transaction otherwise provides
for the exchange of the outstanding shares of Series D Convertible Preferred
Stock for a like-kind preferred stock of the acquiror/surviving corporation; or
(iii) upon the affirmative vote of holders of eighty (80%) percent of the Series
D Convertible Preferred Stock.
The contingent warrants and the shares of the Series D Convertible Preferred
Stock were issued in a transaction exempt from the registration requirements of
the Securities Act of 1933, pursuant to Section 4(2) and Rule 506 thereunder.
The shares of our common stock issued upon conversion of our Series C Preferred
Stock were issued in a transaction exempt from the registration requirements of
the Securities Act of 1933 pursuant to Section 3(a)(9) thereunder.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
23
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
4.27 Non-Qualified Stock Option Agreement between the Company and
Stephen M. Cohen dated July 3, 2002. (Corrected version of Exhibit
4.27 filed with Form 10-Q for the Quarter Ended June 30, 2002)
4.28 Non-Qualified Stock Option Agreement between the Company and Bohn
H. Crain dated July 3, 2002. (Corrected version of Exhibit 4.28
filed with Form 10-Q for the Quarter Ended June 30, 2002)
4.29 Form of Contingent Warrant
4.30 Form of Amendment to Series C Warrants
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) The Company filed the following Current Reports on Form 8-K during the
three-month period ended September 30, 2002:
(i) Current Report on Form 8-K, dated July 3, 2002. The Company filed
the foregoing Current Report on Form 8-K reporting under Item 5
the granting of new options and modification of existing options,
to certain senior executive personnel.
(ii) Current Report on Form 8-K, dated July 15, 2002. The Company
filed the foregoing Current Report on Form 8-K reporting under
Item 5 the modification of certain options granted to the
Company's Chief Executive Officer.
(iii) Current Report on Form 8-K, dated August 2, 2002. The Company
filed the foregoing Current Report on Form 8-K reporting under
Item 5 the completion of the restructuring of the Company's
outstanding shares of Series C Preferred Stock.
(iv) Current Report on Form 8-K, dated August 14, 2002. The Company
filed the foregoing Current Report on Form 8-K reporting under
Item 9 the required certification of the Company's Chief
Executive Officer and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
24
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: November 14, 2002 /s/ Dennis L. Pelino
--------------------
Dennis L. Pelino
Chief Executive Officer and
Chairman of the Board of Directors
Date: November 14, 2002 /s/ Bohn H. Crain
-----------------
Bohn H. Crain
Chief Financial Officer & Treasurer
Date: November 14, 2002 /s/ Thomas L. Scully
--------------------
Thomas L. Scully
Vice President - Finance and
Principal Accounting Officer
25
CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES OXLEY ACT OF 2002
I, Dennis L. Pelino, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Stonepath Group,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"), and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors;
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
DATE: November 14, 2002
-----------------
BY: /s/ Dennis L. Pelino
----------------------
Dennis L. Pelino
Chief Executive Officer and
Chairman of the Board of Directors
26
CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES OXLEY ACT OF 2002
I, Bohn H. Crain, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Stonepath Group,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"), and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors;
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
DATE: November 14, 2002
-----------------
BY: /s/ Bohn H. Crain
-----------------------------------
Bohn H. Crain
Chief Financial Officer & Treasurer
27