UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 2
to Form 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to ____________________.
Commission file number 001-16105
STONEPATH GROUP, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 65-0867684
------------------------------ ------------------------------------
(State or Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1600 Market Street, Suite 1515
Philadelphia, PA 19103
------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (215) 979-8370
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by a check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act.) Yes [_] No [X]
There were 29,128,373 issued and outstanding shares of the registrant's
common stock, par value $.001 per share, at July 31, 2003.
STONEPATH GROUP, INC.
INDEX
Page
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Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) at June 30, 2003
and December 31, 2002 ...............................................1
Consolidated Statements of Operations (Unaudited - As restated)
Three and six months ended June 30, 2003 and 2002....................2
Consolidated Statements of Cash Flows (Unaudited)
Six months ended June 30, 2003 and 2002..............................3
Notes to Unaudited Consolidated Financial Statements.................4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ......................17
Item 3. Quantitative and Qualitative Disclosures About Market Risk .........33
Item 4. Controls and Procedures.............................................33
Part II. Other Information
Item 1. Legal Proceedings ..................................................35
Item 2. Changes in Securities and Use of Proceeds ..........................35
Item 3. Defaults Upon Senior Securities ....................................36
Item 4. Submission of Matters to a Vote of Security Holders ................36
Item 5. Other Information ..................................................37
Item 6. Exhibits and Reports on Form 8-K ...................................37
SIGNATURES...................................................................39
i
Explanatory Note
This Form 10-Q/A is being filed to restate our unaudited consolidated
statements of operations for the three and six months ended June 30, 2003 and
2002, and to make certain conforming changes to the narrative disclosures within
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The restatement is to correct an overstatement of total revenue and
cost of transportation, in like amounts, previously reported by our
International Services division, with no resulting impact on our consolidated
net revenue, EBITDA or net income (loss). A description of the restatement can
be found under Footnote 2 to our unaudited consolidated financial statements.
The "Financial Outlook" section within Item 2 of our Form 10-Q/A has been
omitted as it has been superceded by subsequent guidance provided by us. Part II
of the Form 10-Q/A has been subject to no modification as of and for the periods
reflected. Except as otherwise specifically noted, all information contained
herein is as of June 30, 2003 and does not reflect any events or changes in
information that may have occurred subsequent to that date. This Form 10-Q/A is
hereby amended as described above, and for convenience of reference is restated
in its entirety as set forth herein (except that certain exhibits that were
previously filed with the Form 10-Q/A have been omitted).
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
STONEPATH GROUP, INC.
Condensed Consolidated Balance Sheets
(UNAUDITED)
June 30, 2003 December 31, 2002
--------------- -----------------
Assets
Current assets:
Cash $ 360,131 $ 2,266,108
Accounts receivable, net 26,111,674 21,799,983
Other current assets 2,253,212 1,002,695
--------------- -----------------
Total current assets 28,725,017 25,068,786
Goodwill and acquired intangibles, net 29,771,743 25,353,705
Furniture and equipment, net 6,754,063 3,233,677
Other assets 1,418,302 1,509,347
--------------- -----------------
$ 66,669,125 $ 55,165,515
=============== =================
Liabilities and Stockholders' Equity
Current liabilities:
Line of credit - bank $ 5,618,000 $ --
Accounts payable 11,754,894 12,873,703
Accrued expenses 4,130,994 2,981,375
Earn-out payable -- 3,879,856
Interim financing agreement, current portion 607,382 --
--------------- -----------------
Total current liabilities 22,111,270 19,734,934
Interim financing agreement, net of current portion 1,353,570 --
--------------- -----------------
Total liabilities 23,464,840 19,734,934
--------------- -----------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares
authorized; Series D, convertible, issued and outstanding:
360,745 shares (Liquidation preference: $21,644,700) 361 361
Common stock, $.001 par value, 100,000,000 shares
authorized; issued and outstanding: 29,037,973 and 23,453,414
shares at 2003 and 2002, respectively 29,038 23,453
Additional paid-in capital 203,833,429 196,235,064
Accumulated deficit (160,589,753) (160,711,891)
Deferred compensation (68,790) (116,406)
--------------- -----------------
Total stockholders' equity 43,204,285 35,430,581
--------------- -----------------
$ 66,669,125 $ 55,165,515
=============== =================
See accompanying notes to unaudited consolidated financial statements.
1
STONEPATH GROUP, INC.
Consolidated Statements of Operations
(UNAUDITED)
Three months ended June 30, Six months ended June 30,
---------------------------- ---------------------------
2003 2002 2003 2002
Restated Restated Restated Restated
(See Note 2) (See Note 2) (See Note 2) (See Note 2)
------------ ----------- ----------- -----------
Total revenue $46,333,898 $28,524,745 $84,906,339 $41,590,305
Cost of transportation 32,228,800 19,739,026 58,617,601 28,384,995
----------- ----------- ----------- -----------
Net revenue 14,105,098 8,785,719 26,288,738 13,205,310
Personnel costs 7,003,018 4,526,918 13,566,098 7,119,994
Other selling, general
and administrative costs 6,058,820 3,520,735 10,361,193 6,186,314
Depreciation and amortization 570,451 523,119 1,160,229 966,466
Litigation settlement -- -- 750,000 --
----------- ----------- ----------- -----------
Income (loss) from operations 472,809 214,947 451,218 (1,067,464)
Other income, net 54,620 53,317 84,127 108,774
------------ ----------- ----------- -----------
Income (loss) from continuing
operations before income taxes 527,429 268,264 535,345 (958,690)
Income taxes 42,995 -- 58,216 --
----------- ----------- ----------- -----------
Income (loss) from continuing operations 484,434 268,254 477,129 (958,690)
Loss from discontinued operations, net
of tax (354,991) -- (354,991) --
----------- ----------- ----------- -----------
Net income (loss) 129,443 268,264 122,138 (958,690)
Preferred stock dividends -- (892,116) -- (1,779,888)
----------- ----------- ----------- -----------
Net income (loss) attributable
to common stockholders $ 129,443 $ (623,852) $ 122,138 $(2,738,578)
=========== =========== =========== ===========
Basic earnings (loss) per common share -
Continuing operations(1) $ 0.02 $ (0.03) $ 0.02 $ (0.13)
Discontinued operations (0.02) -- (0.02) --
----------- ----------- ----------- -----------
Earnings (loss) per common share $ -- $ (0.03) $ -- $ (0.13)
=========== =========== =========== ===========
Diluted earnings (loss) per common
share -
Continuing operations(1) $ 0.01 $ (0.03) $ 0.01 $ (0.13)
Discontinued operations (0.01) -- (0.01) --
----------- ----------- ----------- -----------
Earnings (loss) per common share $ -- $ (0.03) $ -- $ (0.13)
=========== =========== =========== ============
Basic weighted average shares
outstanding 28,410,129 21,227,481 26,597,540 21,066,192
=========== =========== =========== ===========
Diluted weighted average shares and
share equivalents outstanding 38,082,567 21,227,481 35,305,458 21,066,192
=========== =========== =========== ===========
(1) Includes effect of preferred stock dividends in 2002.
See accompanying notes to unaudited consolidated financial statements.
2
STONEPATH GROUP, INC.
Consolidated Statements of Cash Flows
(UNAUDITED)
Six months ended June 30,
----------------------------
2003 2002
----------- ------------
Cash flow from operating activities:
Net income (loss) $ 122,138 $ (958,690)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 1,160,229 966,466
Stock-based compensation 47,616 48,282
Issuance of common stock in litigation settlement 350,000 --
Discontinued operations - issuance of common stock to consultant 128,000
Loss on disposal of furniture and equipment -- 4,208
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable (4,311,691) (1,715,635)
Other assets (1,069,842) (59,375)
Accounts payable and accrued expenses (213,966) (1,962,253)
----------- ------------
Net cash used in operating activities (3,787,516) (3,676,997)
----------- ------------
Cash flows from investing activities:
Purchases of furniture and equipment (3,905,048) (326,525)
Acquisitions of businesses, net of cash acquired (3,770,000) (9,805,403)
Loans made (320,909) (350,000)
Payment of earn-out (3,476,856) --
Discontinued operations - investing activities -- 115,000
----------- ------------
Net cash used in investing activities (11,472,813) (10,366,928)
----------- ------------
Cash flows from financing activities:
Issuance of common stock in private placement, net of costs 5,670,539 --
Net proceeds from line of credit - bank 5,618,000 --
Proceeds from financing of equipment 1,960,952 --
Proceeds from issuance of common stock upon exercise of options
and warrants 104,861 367,683
----------- ------------
Net cash provided by financing activities 13,354,352 367,683
----------- ------------
Net decrease in cash and cash equivalents (1,905,977) (13,676,242)
Cash and cash equivalents at beginning of year 2,266,108 15,227,830
----------- ------------
Cash and cash equivalents at end of period $ 360,131 $ 1,551,588
=========== ============
Supplemental disclosure of non-cash investing activities
Issuance of common stock in connection with acquisition of Regroup $ 1,000,000 $ --
Issuance of common stock in connection with payment of earnout $ 443,300 $ --
See accompanying notes to unaudited consolidated financial statements.
3
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
June 30, 2003
(1) Nature of Operations and Basis of Presentation
Stonepath Group, Inc. and subsidiaries (the "Company") is a non-asset
based third-party logistics services company providing supply chain solutions on
a global basis. The Company offers a full range of time-definite transportation
and distribution solutions through its Domestic Services platform, where the
Company manages and arranges the movement of raw materials, supplies, components
and finished goods for its customers. The Company offers a full range of
international logistics services including international air and ocean
transportation as well as customs house brokerage services through its
International Services platform. In addition to these core service offerings,
the Company also provides a broad range of value added supply chain management
services, including warehousing, order fulfillment and inventory management. The
Company services a customer base of manufacturers, distributors and national
retail chains.
The accompanying unaudited consolidated financial statements were
prepared in accordance with generally accepted accounting principles for interim
financial information. Certain information and footnote disclosures normally
included in financial statements have been condensed or omitted pursuant to the
rules and regulations of the U.S. Securities and Exchange Commission (the "SEC")
relating to interim financial statements. These statements reflect all
adjustments, consisting only of normal recurring accruals, necessary to present
fairly the Company's financial position, operations and cash flows for the
periods indicated. While the Company believes that the disclosures presented are
adequate to make the information not misleading, these unaudited consolidated
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-K/A for the year ended December 31, 2002. Interim operating
results are not necessarily indicative of the results for a full year because
our operating results are subject to seasonal trends when measured on a
quarterly basis. Our first and second quarters are likely to be weaker as
compared with our other fiscal quarters, which we believe is consistent with the
operation results of other supply chain service provides.
4
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
June 30, 2003
(2) Restatement of Previously Reported Consolidated Financial Statements
In August 2003, the Company restated its consolidated financial
statements for the years ended December 31, 2001 and 2002 and the first two
quarters of 2003. That restatement related to (i) allocating more value to the
customer relationship intangible assets for the Company's acquisitions and (ii)
revising the amortization method and life used for such assets. The amounts
appearing in the accompanying consolidated balance sheets as of June 30, 2003
and December 31, 2002, and the related consolidated statements of operations and
cash flows for the three and six months ended June 30, 2003 and 2002 reflect the
effect of that restatement and are considered "previously reported" for purposes
of this Form 10-Q/A.
During the third week of December 2003, and in the course of conducting
a regularly scheduled review of internal controls and centralization of the
financial reporting process, the Company discovered an error in the legacy
accounting process of its International Services division. Due to the error in
the legacy accounting process, the division failed to eliminate in the
consolidation process certain intercompany transactions between Stonepath
Logistics International Services, Inc. (formerly known as "Global Transportation
Systems, Inc.") and Global Container Line, Inc., its wholly-owned subsidiary
which operates as a non-vessel operating common carrier. This resulted in an
overstatement of revenues and a corresponding overstatement of the cost of
transportation, with no resulting impact on net revenues, EBITDA or net income
(loss). The Company has determined that this error had been embedded in the
legacy accounting processes of Global Transportation Systems, Inc. for a period
which began substantially before its acquisition by the Company in April 2002.
The effects of this restatement on the previously reported consolidated
statements of operations for the three and six months ended June 30, 2003 and
2002 are summarized below.
Three months ended June 30, 2003 Three months ended June 30, 2002
-------------------------------- --------------------------------
As As
Previously As Previously As
Reported Restated Reported Restated
----------- ----------- ----------- -----------
Selected Statement of Operations Data:
Total revenue $54,407,172 $46,333,898 $32,689,603 $28,524,745
Cost of transportation 40,302,074 32,228,800 23,903,884 19,739,026
Six months ended June 30, 2003 Six months ended June 30, 2002
-------------------------------- -------------------------------
As As
Previously As Previously As
Reported Restated Reported Restated
----------- ----------- ----------- -----------
Selected Statement of Operations Data:
Total revenue $99,772,376 $84,906,339 $45,755,163 $41,590,305
Cost of transportation 73,483,638 58,617,601 32,549,853 28,384,995
5
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
June 30, 2003
(3) Recent Acquisitions
On June 20, 2003, the Company acquired, through its indirect wholly
owned subsidiary, Stonepath Logistics Government Services, Inc. ("SLGS"), the
business of Regroup Express LLC, a Virginia limited liability company
("Regroup") for $3,700,000 in cash and $1,000,000 of the Company's common stock
paid at closing, plus contingent consideration of up to an additional
$12,500,000 payable over a period of five years based on the future financial
performance of SLGS following the acquisition. The members of Regroup may also
be entitled to an additional earn-out payment to the extent its pre-tax earnings
exceed $17,500,000 during the earn-out period. The Company used funds from its
credit facility with LaSalle Business Credit, Inc. for the cash payment at the
closing. The business acquired from Regroup provides time-definite domestic and
international transportation services including air and ground freight
forwarding, ocean freight forwarding, major project logistics as well as local
pick up and delivery services. The customers of the acquired business include
U.S. government agencies and contractors, select companies in the retail
industry and other commercial businesses. The acquisition, which significantly
enhances the Company's presence in the Washington, D.C. market, was accounted
for as a purchase and accordingly, the results of operations and cash flows of
the business acquired from Regroup are included in the accompanying consolidated
financial statements prospectively from the date of acquisition. The total
purchase price, including acquisition expenses of $260,000, but excluding the
contingent consideration, was $4,960,000. The following table summarizes the
preliminary allocation of the purchase price based on estimated fair value of
the assets acquired at June 20, 2003 (in thousands):
Furniture and equipment $ 50
Goodwill and other intangible assets 4,910
------
Total assets acquired $4,960
======
The following unaudited pro forma information is presented as if the
acquisition of Regroup had occurred on January 1, 2002:
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
Restated Restated Restated Restated
----------- ----------- ----------- -----------
Revenues $50,121,793 $31,311,075 $93,209,247 $47,101,976
Income (loss) from continuing
operations 725,950 463,337 945,567 (773,554)
Net income (loss) 370,959 (428,779) 590,576 (2,553,442)
Earnings (loss) per share:
Basic $ 0.01 $ (0.02) $ 0.02 $ (0.12)
Diluted $ 0.01 $ (0.02) $ 0.02 $ (0.12)
6
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
June 30, 2003
(4) Stock-Based Compensation
In December 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," which amended the
disclosure requirements of SFAS No. 123, "Accounting and Disclosure of
Stock-Based Compensation" to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
Company accounts for its employee stock option grants by applying the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations.
The table below illustrates the effect on net income (loss)
attributable to common stockholders and income (loss) per common share as if the
fair value of options granted had been recognized as compensation expense in
accordance with the provisions of SFAS No. 123.
Three months ended June 30, Six months ended June 30,
------------------------------- -----------------------------------
2003 2002 2003 2002
--------- --------- ----------- -----------
Net income (loss) attributable to common stockholders:
As reported $ 129,443 $(623,852) $ 122,138 $(2,738,578)
Add: stock-based employee compensation expense
included in reported net income (loss) 22,617 344 45,235 48,282
Deduct: total stock-based compensation expense
determined under fair value method for all
awards (490,328) (314,161) (1,275,707) (628,322)
--------- --------- ----------- -----------
Pro forma net loss attributable to
common stockholders $(338,268) $(937,669) $(1,108,334) $(3,318,618)
========= ========= =========== ===========
Basic earnings (loss) per common share:
As reported $ -- $ (0.03) $ -- $ (0.13)
Pro forma (0.01) (0.04) (0.04) (0.16)
Diluted earnings (loss) per common share:
As reported $ -- $ (0.03) $ -- $ (0.13)
Pro forma (0.01) (0.04) (0.04) (0.16)
(5) 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 the Company and some portion, if not all, of the
contingent earn-out payments and other cash requirements associated with the
acquisitions. Therefore, the Company anticipates 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.
7
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
June 30, 2003
Interest expense for the three- and six-month periods ended June 30,
2003 amounted to $4,000. The Company did not incur any interest expense in the
comparable prior year periods.
At June 30, 2003, based on available collateral and outstanding letter
of credit commitments, there was $9,200,000 available for borrowing under the
Facility (see Note 11).
(6) Commitments and Contingencies
On May 6, 2003, the Company elected to settle litigation instituted on
August 20, 2000 by Austost Anstalt Schaan, Balmore Funds, S.A. and Amro
International, S.A. Although it was believed that the plaintiffs' claims were
without merit, the Company chose to settle the matter in order to avoid future
litigation costs and to mitigate the diversion of management's attention from
operations. The total settlement costs of $750,000, payable $400,000 in cash and
$350,000 in shares of the Company's common stock, are included in the
accompanying unaudited consolidated statement of operations for the six months
ended June 30, 2003.
On October 12, 2000, Emergent Capital Investment Management, LLC
("Emergent") filed suit against the Company and two of its officers contending
that it was misled by statements made by the defendants in connection with the
offering of the Company's Series C Preferred Stock which closed in March 2000.
Specifically, Emergent alleges that it is entitled to rescind the transaction
because it was allegedly represented that the size of the offering would be
$20,000,000 and the Company actually raised $50,000,000. Emergent seeks a return
of its $2,000,000 purchase price of Series C shares. In June of 2001, the
Company moved for summary judgment in this case.
After the summary judgment motion was filed, Emergent filed a second
action against the Company and two of its officers alleging different
allegations of fraud in connection with the Series C offering. In the new
complaint, Emergent alleges that oral statements and written promotional
materials distributed by the Company at a meeting in connection with the Series
C offering were materially inaccurate with respect to the Company's investment
in Net Value, Inc., a wholly owned subsidiary of the Company. Emergent also
contends that the defendants failed to disclose certain allegedly material
transactions in which an officer was involved prior to his affiliation with the
Company. The Company filed a motion to dismiss this new action for failure to
state a claim upon which relief can be granted.
On October 2, 2001, the Court entered an order granting summary
judgment to the defendants in the first case filed by Emergent and dismissing
Emergent's second complaint for failure to state a claim upon which relief can
be granted. The Court allowed Emergent 20 days to file a second amended
complaint as to the second action only. On October 21, 2001, Emergent did file a
second amended complaint in the second action.
8
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
June 30, 2003
The second amended complaint does not raise any new factual allegations
regarding Emergent's participation in the offering.
The Company filed a motion to dismiss Emergent's second amended
complaint. On April 15, 2002, the United States District Court for the Southern
District of New York entered an order granting the motion to dismiss Emergent's
second amended complaint against the Company and its former officers. The Court
refused to grant Emergent an additional opportunity to re-plead its claims
against the defendants and a final order dismissing the matter has been entered.
Emergent thereafter filed a notice of appeal to the United States Court of
Appeals for the Second Circuit, which is currently pending. The Company intends
to vigorously defend this action. The Company has not established any accrual
for this action since (i) it believes that there are substantial defenses to the
plaintiff's claims, and (ii) the amount of loss, if any, cannot be reasonably
estimated. Notwithstanding the Company's belief, there can be no assurances that
the Company will not incur material expenses in the defense and resolution of
this matter.
One of the Company's customers which is the subject of a Chapter 11
proceeding under the Bankruptcy Code paid to the Company approximately
$1,300,000 of pre-petition indebtedness for shipping and delivery charges
pursuant to an order of a United States Bankruptcy Court authorizing the payment
of such charges. One of the creditors in the Chapter 11 proceeding appealed
other orders of the Bankruptcy Court authorizing the payment of pre-petition
indebtedness to other creditors for other charges, and those orders have been
reversed by a United States District Court. The Company's customer has appealed
the District Court's reversal and that appeal is pending. While no action has
been taken in the Bankruptcy Court to challenge the payments made to the
Company, if such action were taken in the future and that action were
successful, the Company could be required to return all or a substantial portion
of the payments made by the customer.
The Company may become involved in various other claims and legal
actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or liquidity. As of June 30, 2003, the Company has not established
any accruals for any pending legal proceedings.
The Company entered into a master lease agreement with LaSalle National
Leasing Corporation effective June 6, 2003 to provide up to $2,750,000 in
financing for the deployment of the Tech-LogisTM operating system and the
unrelated installation of sorting equipment to automate the operations of one of
the Company's strategic logistics centers. As part of this arrangement, the
Company entered into an interim financing agreement which enabled the Company to
finance its purchase of the assets discussed above while the costs of the lease
arrangement were being accumulated. As of June 30, 2003, there was $1,961,000
outstanding under the interim financing agreement.
On July 28, 2003, as contemplated in the master lease and related
interim financing agreements with LaSalle National Leasing Corporation effective
June 6, 2003, the Company sold and leased back the technology and sorting
equipment, which effectively retired the related interim financing arrangements,
and commenced the base term of a three-year capital lease for the technology
equipment totaling $2,000,000 and commenced the base term of a three-year
operating lease for the sorting equipment. Payments under both the capital and
operating leases will be approximately $62,000 and $22,000 per month,
respectively.
9
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
June 30, 2003
(7) Stockholders' Equity
Common Stock
On March 6, 2003, the Company completed a private placement of
4,470,000 shares of its common stock. The transaction consisted of the sale of
4,270,000 shares at $1.35 per share and 200,000 shares at $1.54 per share. In
connection with this transaction, the Company realized gross proceeds of
$6,072,500, paid a brokerage fee consisting of cash commissions of $364,350,
issued placement agent warrants to purchase 297,000 shares of common stock at an
exercise price of $1.49 per share, and incurred other cash expenses of $37,611.
In addition, the Company had previously paid the placement agent $25,000 in cash
and had issued it warrants to purchase 150,000 shares of common stock at an
exercise price of $1.23 per share.
In connection with the private placement, the Company agreed to
register the shares underlying the warrants, as well as the shares that were
actually issued. Until the matter under discussion with the SEC is resolved, the
registration statement that was filed will not be declared effective. Under the
terms of the private placement agreement, the Company must pay a penalty of
$150,000 to the investors as of July 3, 2003 and at the end of each 30-day
period thereafter, until it files an effective registration statement. The
Company has not reflected the $150,000 penalty in the accompanying consolidated
financial statements.
Series C Preferred Stock
In March 2000, the Company completed a private placement transaction in
which it issued 4,166,667 shares of its Series C Preferred Stock and warrants to
purchase 416,667 shares of its common stock for aggregate gross proceeds of
$50,000,000.
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.
10
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
June 30, 2003
In exchange for these consents, the Company agreed to a private
exchange transaction (the "Exchange Transaction") in which it would issue to the
holders of the Series C Preferred Stock as of July 18, 2002 (the "conversion
date"), additional warrants to purchase up to a maximum of 2,692,194 shares of
its common stock at an exercise price of $1.00 per share, and reduce the per
share exercise price from $26.58 to $1.00 for 307,806 existing warrants owned by
the holders of the Series C Preferred Stock. As a condition to receiving the
additional warrants and having their existing warrants re-priced, the holders of
the Series C Preferred Stock agreed to convert their shares of preferred stock
into shares of the Company's common stock on the conversion date.
At the request of the largest holder of Series C Preferred Stock
(because of legal limitations in its governing instruments which prevent it from
holding investments in common stock), the Company expanded the Exchange
Transaction to include an additional alternative. Holders of the Series C
Preferred Stock as of the conversion date were provided with the alternative of
exchanging the common stock issuable upon conversion of the Series C Preferred
Stock, the additional warrants and re-priced warrants, for shares of a newly
designated Series D Convertible Preferred Stock.
As a result of the exercise of these rights by the holders of the
Series C Preferred Stock, as of July 19, 2002, all of the Company's shares of
Series C Preferred Stock, representing approximately $44,600,000 in liquidation
preferences, together with warrants to purchase 149,457 shares of the Company's
common stock, were surrendered and retired in exchange for a combination of
securities consisting of:
o 1,911,071 shares of the Company's common stock;
o 1,543,413 warrants to purchase the Company's common stock at an
exercise price of $1.00; and
o 360,745 shares of the Company's Series D Convertible Preferred
Stock.
The Series C Preferred Stock, which was converted into Series D
Convertible Preferred Stock, had a carrying value of approximately $21,645,000.
The Company obtained an independent appraisal which valued the Series D
Convertible Preferred Stock at approximately $4,672,000. The excess of the
carrying value of the Series C Preferred Stock over the fair value of the Series
D Convertible Preferred Stock was added to net income for purposes of computing
net income attributable to common stockholders for the year ended December 31,
2002. The Exchange Transaction had no effect on the cash flows of the Company.
The holders of the Series C Preferred Stock earned 148,324 additional
shares of Series C Preferred Stock from payment of preferred stock dividends
during the six months ended June 30, 2002. No further preferred stock dividends
were payable on the Series C Preferred Stock after July 18, 2002.
11
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
June 30, 2003
Series D Convertible Preferred Stock
The Series D Convertible Preferred Stock is convertible into 3,607,450
shares of the Company's 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 Convertible Preferred Stock are entitled to a liquidation
preference equal to $60.00 per share, paid prior to and in preference to any
payment made or set aside for holders of the Company's common stock, but
subordinate and subject in preference to the prior payment in full of all
amounts to which holders of other classes of the Company's preferred stock may
be entitled to receive as a result of such liquidation, dissolution or
winding-up. Subsequent to December 31, 2003, the holders of the Series D
Convertible Preferred Stock are entitled to participate in all liquidation
distributions made to the holders of the Company's common stock on an as-if
converted basis. The Series D Convertible Preferred Stock carries no dividend,
and, except under limited circumstances, has no voting rights except as required
by law. In addition, the Series D Convertible Preferred Stock will convert into
3,607,450 shares of the Company's common stock no later than December 31, 2004.
Stock Options and Warrants
On February 24, 2003, the Company issued to its Chief Financial Officer
and one other employee options to purchase 210,000 shares of its common stock at
an exercise price of $1.53 per share, which equaled the quoted market price on
the date of grant.
On March 10, 2003, the Company issued to its Chairman and Chief
Executive Officer options to purchase 300,000 shares of its common stock at an
exercise price of $1.68 per share, which equaled the quoted market price on the
date of grant. On that same day, the Company issued to its Chairman and Chief
Executive Officer options to purchase 400,000 shares of its common stock at an
exercise price of $2.00 per share, which represented a 19% premium over the
quoted market price of $1.68 on the date of grant.
On March 25, 2003, the Company issued to certain officers and employees
options to purchase 81,600 shares of its common stock at an exercise price of
$1.81 per share, which equaled the quoted market price on the date of grant.
On June 2, 3003, the Company issued to a director and the chief
operating officer of its domestic operations options to purchase 350,000 shares
of its common stock at an exercise price of $2.04 per share, which equaled the
quoted market price on the date of grant.
During the six months ended June 30, 2003, options on 273,200 shares
expired. The weighted average exercise price for those options was $9.27 per
share.
12
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
June 30, 2003
During the six months ended June 30, 2003, the Company issued warrants
to purchase 297,000 shares of its common stock at an exercise price of $1.49 per
share. The Company issued these warrants to a private placement agent in
connection with the private placement of the Company's common stock described
above.
During the six months ended June 30, 2003, warrants issued to
non-employees for the purchase of 241,296 shares of the Company's common stock
were exercised. The Company canceled warrants to purchase 136,399 shares of its
common stock in connection with a cashless exercise by the holder.
(8) Earnings (Loss) per Share
Basic earnings (loss) per common share and diluted earnings (loss) per
common share are presented in accordance with SFAS No. 128, "Earnings per
Share." Basic earnings (loss) per common share has been computed using the
weighted-average number of shares of common stock outstanding during the period.
Diluted earnings (loss) per common share incorporates the incremental shares
issuable upon the assumed exercise of stock options and warrants and upon the
assumed conversion of the Company's preferred stock, if dilutive. Certain stock
options, stock warrants, and convertible securities were excluded from the
calculation of diluted earnings (loss) per share because their effect was
antidilutive. The total numbers of such shares excluded from the diluted
earnings (loss) per common share calculations are 288,600 and 12,848,242 for the
three months ended June 30, 2003 and 2002, respectively, and 766,777 and
12,915,954 for the six months ended June 30, 2003 and 2002, respectively.
(9) Segment Information
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," established standards for reporting information about operating
segments in financial statements. Operating segments are defined as components
of an enterprise engaging in business activities about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker or group in deciding how to allocate resources and in assessing
performance. The Company determined that it had one operating segment in the
first quarter of 2002, Domestic Services, which provides a full range of
logistics and transportation services throughout North America. In the second
quarter of 2002, with the acquisition of SLIS, the Company established its
International Services platform, which provides international air and ocean
logistics services. The Company identifies operating segments based on the
principal service provided by the business unit. Each segment has a separate
management structure. The accounting policies of the reportable segments are the
same as described in the Company's Annual Report on Form 10-K/A for the year
ended December 31, 2002. Segment information, in which corporate expenses (other
than the legal settlement) have been fully allocated to the operating segments,
is as follows (in thousands):
13
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
June 30, 2003
Three months ended June 30, 2003
-----------------------------------------------------------
Restated
Domestic International Restated
Services Services Corporate Total
--------- ------------- --------- --------
Revenue from external customers $ 24,061 $ 22,273 $ -- $ 46,334
Intersegment revenue 6 29 -- 35
Income (loss) from operations (166) 639 -- 473
Three months ended June 30, 2002
-----------------------------------------------------------
Restated
Domestic International Restated
Services Services Corporate Total
--------- ------------- --------- --------
Revenue from external customers $ 16,345 $ 12,180 $ -- $ 28,525
Intersegment revenue -- -- -- --
Income (loss) from operations (98) 313 -- 215
Six months ended June 30, 2003
-----------------------------------------------------------
Restated
Domestic International Restated
Services Services Corporate Total
--------- ------------- --------- --------
Revenue from external customers $ 47,835 $ 37,071 $ -- $ 84,906
Intersegment revenue 40 57 -- 97
Income (loss) from operations 95 1,106 (750) 451
Segment assets 47,238 15,778 3,653 66,669
Segment goodwill and intangibles, net 24,309 5,463 -- 29,772
Six months ended June 30, 2002
-----------------------------------------------------------
Restated
Domestic International Restated
Services Services Corporate Total
--------- ------------- --------- --------
Revenue from external customers $ 29,317 $ 12,273 $ -- $ 41,590
Intersegment revenue -- -- -- --
Income (loss) from operations (1,110) 43 -- (1,067)
Segment assets 33,307 10,028 1,300 44,635
Segment goodwill and intangibles, net 17,303 4,513 -- 21,816
14
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
June 30, 2003
The revenue in the table below is allocated to geographic areas based
upon the location of the customer (in thousands):
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
Restated Restated Restated Restated
-------- -------- -------- --------
Total revenue:
United States $ 45,780 $ 28,525 $ 83,903 $ 41,590
Hong Kong 554 -- 1,003 --
-------- -------- -------- --------
Total $ 46,334 $ 28,525 $ 84,906 $ 41,590
======== ======== ======== ========
(10) Discontinued Operations
In the second quarter of 2003, the subtenant in a property previously
used in the Company's former internet business vacated the property and
attempted to terminate the sublease agreement. Shortly thereafter, the subtenant
filed for bankruptcy. Due to an inability to find a replacement subtenant, the
Company has accrued the remaining lease liability amounting to approximately
$227,000, net of taxes, and such amount has been reflected as part of
discontinued operations in the accompanying consolidated statements of
operations for the three and six month periods ended June 30, 2003.
In the second quarter of 2003, a consultant to the Company's former
internet business demanded payment for services provided in 2000. Based on
negotiations with the consultant, the Company agreed to issue 50,000 shares of
its common stock in satisfaction of the claim, which amounted to approximately
$128,000, net of taxes. Such amount has been reflected as part of discontinued
operations in the accompanying consolidated statements of operations for the
three and six month periods ended June 30, 2003.
(11) Subsequent Events
On July 16, 2003, the Company acquired the business of Customs Services
International, Inc. ("CSI"), a Miami-based, privately held international freight
forwarder and customs broker for $1,400,000 in cash, which was provided from
funds available under the Facility, and up to an additional $2,400,000 payable
over a five year earn-out period based upon the future financial performance of
CSI. The acquisition will be accounted for as a purchase and accordingly, the
results of operations and cash flows of CSI will be reflected in the Company's
consolidated financial statements for periods subsequent to the date of the
transaction. The acquisition, which enhances the Company's presence in Miami and
provides a platform throughout Central America, South America and the Caribbean,
is not reflected in the accompanying consolidated financial statements.
On August 8, 2003, the Company acquired a 70% interest in the Singapore
and Cambodia based operations of the G-Link Group ("G-Link"), a regional
logistics business headquartered in Singapore with offices throughout Southeast
Asia. As consideration for the purchase, the Company paid $3,700,000 at closing
through a combination of $2,800,000 in cash, which was provided from funds
available under the Facility, and $900,000 of Company common stock and agreed to
issue to G-Link
15
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
June 30, 2003
a thirty percent interest in the subsidiaries which acquired the operations. As
additional purchase price, on a post-closing basis, the Company has agreed to
pay G-Link for excess working capital estimated at $1,600,000 through the
issuance of Company common stock. G-Link will also be entitled to an earn-out
arrangement over a period of four years of up to $2,500,000 contingent upon the
future financial performance of the business. The acquisition will be accounted
for as a purchase and accordingly, the results of operations and cash flows of
G-Link will be reflected in the Company's consolidated financial statements for
periods subsequent to the date of the transaction. The G-Link acquisition
facilitates the Company's expansion into a rapidly growing region where most of
the Company's customers have significant supplier relationships. The acquisition
is not reflected in the accompanying consolidated financial statements.
16
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Explanatory Note
This Form 10-Q/A is being filed to restate our unaudited consolidated
statements of operations for the three and six months ended June 30, 2003 and
2002, and to make certain conforming changes to the narrative disclosures within
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The restatement is to correct an overstatement of total revenue and
cost of transportation, in like amounts, previously reported by our
International sales division, with no resulting impact on our consolidated net
revenue, EBITDA or net income (loss). A description of the restatement can be
found under Footnote 2 to our unaudited consolidated financial statements. The
"Financial Outlook" section within Item 2 of our Form 10-Q/A has been omitted as
it has been superceded by subsequent guidance provided by us. Part II of the
Form 10-Q/A has been subject to no modification as of and for the periods
reflected. Except as otherwise specifically noted, all information contained
herein is as of June 30, 2003 and does not reflect any events or changes in
information that may have occurred subsequent to that date. This Form 10-Q/A is
hereby amended as described above, and for convenience of reference is restated
in its entirety as set forth herein (except that certain exhibits that were
previously filed with the Form 10-Q/A have been omitted).
Cautionary Statement For Forward-Looking Statements
This Quarterly Report on Form 10-Q/A includes forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
regarding future results, levels of activity, events, trends or plans. We have
based these forward-looking statements on our current expectations and
projections about such future results, levels of activity, events, trends or
plans. These forward-looking statements are not guarantees and are subject to
known and unknown risks, uncertainties and assumptions about us that may cause
our actual results, levels of activity, events, trends or plans to be materially
different from any future results, levels of activity, events, trends or plans
expressed or implied by such forward-looking statements. In some cases, you can
identify forward-looking statements by terminology such as "may", "will",
"should", "could", "would", "expect", "plan", "anticipate", "believe",
"estimate", "continue", or the negative of such terms or other similar
expressions. While it is impossible to identify all of the factors that may
cause our actual results, levels of activity, events, trends or plans to differ
materially from those set forth in such forward-looking statements, such factors
include the inherent risks associated with: (i) our ability to sustain an annual
growth rate in revenue consistent with recent results, (ii) our ability to
maintain current operating margins, (iii) our ability to identify, acquire,
integrate and manage additional businesses in a manner which does not dilute our
earnings per share, (iv) our ability to obtain the additional capital necessary
to make additional cash acquisitions, (v) the uncertainty of future trading
prices of our common stock and the impact such trading prices may have upon our
ability to utilize common stock to facilitate our acquisition strategy, (vi) the
uncertain effect on the future trading price of our common stock associated with
the dilution upon the conversion of outstanding convertible securities or
exercise of outstanding options and warrants, (vii) our dependence on certain
large customers, (viii) our dependence upon certain key personnel, (ix) an
unexpected adverse result in any legal proceeding, (x) the scarcity and
competition for the operating companies we need to acquire to implement our
business strategy, (xi) competition in the freight forwarding, logistics and
supply chain management industry, (xii) the impact of current and future laws
affecting the Company's
17
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, (xv) the resolution of the
Company's discussions with the SEC over the manner in which the Company has
allocated the consideration paid in its acquisitions to the identifiable assets
of the businesses acquired (which may result in the restatement of earnings to
reflect additional non-cash charges), and (xvi) 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/A for the year ended December 31, 2002. There can be no assurance that
these and other factors will not affect the accuracy of such forward-looking
statements. Readers are cautioned not to place undue reliance on forward-looking
statements, which speak only as of the date made. We undertake no obligation to
publicly release the result of any revision of these forward-looking statements
to reflect events or circumstances after the date they are made or to reflect
the occurrence of unanticipated events.
Overview
We are a non-asset based third-party logistics services company
providing supply chain solutions on a global basis. We offer a full range of
time-definite transportation and distribution solutions through our Domestic
Services platform, where we manage and arrange the movement of raw materials,
supplies, components and finished goods for our customers. We offer a full range
of international logistics services, including international air and ocean
transportation as well as customs house brokerage services, through our
International Services platform. In addition to these core service offerings, we
also provide a broad range of value added supply chain management services,
including warehousing, order fulfillment and inventory management solutions. We
service a customer base of manufacturers, distributors, national retail chains
and government agencies through a network of offices in 21 major metropolitan
areas in North America, plus four international locations, using an extensive
network of over 200 independent carriers and over 150 service partners
strategically located around the world.
As a non-asset based provider of third-party logistics services, we
seek to limit our investment in equipment, facilities and working capital
through contracts and preferred provider arrangements with various
transportation providers who generally provide us with favorable rates, minimum
service levels, capacity assurances and priority handling status. The volume of
our flow of freight enables us to negotiate attractive pricing with our
transportation providers.
Our strategic objective is to build a leading global logistics services
organization that integrates established operating businesses and innovative
technologies. We plan to achieve this objective by broadening our network
through a combination of synergistic acquisitions and the organic expansion of
our existing base of operations. We are currently pursuing an aggressive
acquisition strategy to enhance our position in our current markets and to
acquire operations in new markets. The focus of this strategy is on acquiring
businesses that have demonstrated historic levels of profitability, have a
proven record of delivering high quality services, have a customer base of large
and mid-sized companies and which otherwise may benefit from our long term
growth strategy and status as a public company.
18
Our strategy has been designed to take advantage of shifting market
dynamics. The third party logistics industry continues to grow as an increasing
number of businesses outsource their logistics functions to more cost
effectively manage and extract value from their supply chains. Also, we believe
the industry is positioned for further consolidation as it remains highly
fragmented, and as customers are demanding the types of sophisticated and
broad-reaching service offerings that can more effectively be handled by larger,
more diverse organizations. As a non-asset based provider of third party
logistics services, we can focus on optimizing the transportation solution for
our customers, rather than on our own asset utilization. Our non-asset based
approach allows us to maintain a high level of operating flexibility and
leverage a cost structure that is highly variable in nature.
Our acquisition strategy relies upon two primary factors: first, our
ability to identify and acquire target businesses that fit within our general
acquisition criteria and, second, the continued availability of capital and
financing resources sufficient to complete these acquisitions. Our growth
strategy relies upon a number of factors, including our ability to efficiently
integrate the businesses of the companies we acquire, generate the anticipated
economies of scale from the integration, and maintain the historic sales growth
of the acquired businesses so as to generate continued organic growth. There are
a variety of risks associated with our ability to achieve our strategic
objectives, including our ability to acquire and profitably manage additional
businesses, our current reliance on a small number of key customers, the risks
inherent in international operations, and the intense competition in our
industry for customers and for the acquisition of additional businesses. The
business risks associated with these factors are identified or referred to above
under our "Cautionary Statement for Forward-Looking Statements."
Our principal source of income is derived from freight forwarding
services. As a freight forwarder, we arrange for the shipment of our customers'
freight from point of origin to point of destination. Generally, we quote our
customers a turn key cost for the movement of their freight. Our price quote
will often depend upon the customer's time-definite needs (first day through
fifth day delivery), special handling needs (heavy equipment, delicate items,
environmentally sensitive goods, electronic components, etc.) and the means of
transport (truck, air, ocean or rail). In turn, we assume the responsibility for
arranging and paying for the underlying means of transportation.
We also provide a range of other services including customs brokerage,
warehousing and other services, which include customized distribution,
fulfillment, and other value added supply chain services.
Total revenue represents the total dollar value of services we sell to
our customers. Our cost of transportation includes direct costs of
transportation, including motor carrier, air, ocean and rail services. We act
principally as the service provider to add value in the execution and
procurement of these services to our customers. Our net transportation revenue
(gross transportation revenue less the direct cost of transportation) is the
primary indicator of our ability to source, add value and resell services
provided by third parties, and is considered by management to be a key
performance measure. We believe that net revenue is also an important measure of
economic performance. Net revenue includes transportation revenue and our
fee-based activities, after giving effect to the cost of transportation. In
addition, management believes measuring its operating costs as a function of net
revenue provides a useful metric, as our ability to control costs as a function
of net revenue directly impacts operating earnings. With respect to our services
other than freight transportation, net revenue is identical to total revenue.
19
Our operating results will be affected as acquisitions occur. Since all
acquisitions are made using the purchase method of accounting for business
combinations, our financial statements will only include the results of
operations and cash flows of acquired companies for periods subsequent to the
date of acquisition. Accordingly, our results of operations only reflect the
operations of: Air Plus for periods subsequent to October 5, 2001; SLIS for
periods subsequent to April 4, 2002; United American for periods subsequent to
May 30, 2002; SLGS for periods subsequent to October 1, 2002; the acquired
business operations of Regroup for periods subsequent to June 20, 2003; the
acquired business operations of CSI for periods subsequent to July 18, 2003; and
the Singapore and Cambodia based operations of G-Link for periods subsequent to
August 8, 2003.
Our operating results are also subject to seasonal trends when measured
on a quarterly basis. Our first and second quarters are likely to be weaker as
compared with our other fiscal quarters, which we believe is consistent with the
operating results of other supply chain service providers. This trend is
dependent on numerous factors, including the markets in which we operate,
holiday seasons, consumer demand and economic conditions. Since our revenue is
largely derived from customers whose shipments are dependent upon consumer
demand and just-in-time production schedules, the timing of our revenue is often
beyond our control. Factors such as shifting demand for retail goods and/or
manufacturing production delays could unexpectedly affect the timing of our
revenue. As we increase the scale of our operations, seasonal trends in one area
may be offset to an extent by opposite trends in another area. We cannot
accurately predict the timing of these factors, nor can we accurately estimate
the impact of any particular factor, and thus we can give no assurance that
historical seasonal patterns will continue in future periods.
A significant portion of our revenues is derived from our international
operations, and the growth of those operations is an important part of our
business strategy. Our current international operations are focused on the
shipment of goods into and out of the United States and are dependent on the
volume of international trade with the United States. Our strategic plan
contemplates the growth of those operations, as well as the expansion into the
transportation of goods wholly outside of the United States. The following
factors could adversely affect our current international operations, as well as
the growth of those operations:
o the political and economic systems in certain international
markets are less stable than in the United States;
o wars, civil unrest, acts of terrorism and other conflicts exist
in certain international markets;
o export restrictions, tariffs, licenses and other trade
barriers can adversely affect the international trade serviced
by our international operations;
o managing distant operations with different local market
conditions and practices is more difficult than managing domestic
operations;
o differing technology standards in other countries present
difficulties and expense in integrating our services across
international markets;
o complex foreign laws and treaties can adversely affect our
ability to compete; and
o our ability to repatriate funds may be limited by foreign
exchange controls.
20
Critical Accounting Policies
Our accounting policies, which we believe are in compliance with
accounting principles generally accepted in the United States, require us to
apply methodologies, estimates and judgments that have a significant impact on
the results we report in our financial statements. In our Annual Report on Form
10-K/A for the year ended December 31, 2002 we have discussed those policies
that we believe are critical and require the use of complex judgment in their
application. Since the date of that Form 10-K/A, there have been no material
changes to our critical accounting policies or the methodologies or assumptions
applied under them.
Results of Operations
Quarter ended June 30, 2003 compared to quarter ended June 30, 2002
The following table compares our historical total revenue, net
transportation revenue and other revenue (in thousands):
Quarter ended June 30,
----------------------------
2003 2002 Percent
Restated Restated Change
-------- -------- -------
Total revenue $46,334 $28,525 62.4%
======= =======
Transportation revenue $42,582 $26,012 63.7
Cost of transportation 32,229 19,739 63.3
------- -------
Net transportation revenue $10,353 $ 6,273 65.0
Net transportation margins 24.3% 24.1%
Customs brokerage 2,178 1,748 24.6
Warehousing and other
value added services 1,574 765 105.8
------- -------
Total net revenue $14,105 $ 8,786 60.5
======= =======
Total revenue was $46.3 million in the second quarter of 2003, an
increase of $17.8 million or 62.4% over total revenue of $28.5 million in the
second quarter of 2002. For the second quarter of 2003, $11.9 million, or 66.9%
of the increase in revenues was attributed principally to organic growth in the
Domestic platform while $5.9 million or 33.1% of the increase was attributable
to organic growth in the International platform.
Net transportation revenue was $10.4 million in the second quarter of
2003, an increase of $4.1 million or 65.0% over net transportation revenue of
$6.3 million in the second quarter of 2002. For the second quarter of 2003, $3.0
million, or 73.2% of the increase in net transportation revenue was attributed
principally to organic growth in the Domestic platform while $1.1 million or
26.8% of the increase was attributed to organic growth in the International
platform. Net transportation margins remained relatively flat quarter on
quarter.
21
Net revenue was $14.1 million in the second quarter of 2003, an
increase of $5.3 million or 60.5% over net revenue of $8.8 million in the second
quarter of 2002. For the second quarter of 2003, $3.8 million or 71.7% of the
increase in net revenue was attributed principally to organic growth in the
Domestic platform, while $1.5 million or 28.3% of the increase was attributed to
organic growth in the International platform.
The following table compares certain historical consolidated statement
of operations data as a percentage of our net revenue (in thousands):
Quarter ended June 30,
-----------------------------------------------------------------------
2003 2002 Change
------------------------ ----------------------- --------------------
Amount Percent Amount Percent Amount Percent
--------- -------- --------- -------- ------ -------
Net revenue $ 14,105 100.0 $ 8,786 100.0 $ 5,319 60.5
-------- -------- --------- -------- -------
Personnel costs 7,003 49.7 4,527 51.5 2,476 54.7
Other selling, general and administrative 6,059 43.0 3,521 40.1 2,538 72.1
Depreciation and amortization 570 4.0 523 6.0 47 9.0
-------- -------- --------- -------- -------
Total operating costs 13,632 96.7 8,571 97.6 5,061 59.0
-------- -------- --------- -------- -------
Income from operations 473 3.3 215 2.4 258 120.0
Other income, net 54 0.4 53 0.6 1 1.9
-------- -------- --------- -------- -------
Income from continuing operations
before income taxes 527 3.7 268 3.0 259 96.6
Income taxes (43) (0.3) -- -- (43) NM
-------- -------- --------- -------- -------
Net income from continuing operations 484 3.4 268 3.0 216 80.6
Loss from discontinued operations (355) (2.5) -- -- (355) NM
-------- -------- --------- -------- -------
Net income (loss) 129 0.9 268 3.0 (139) (51.9)
Preferred stock dividends -- -- (892) (10.1) 892 NM
-------- -------- --------- -------- -------
Net income (loss) attributable to common
stockholders $ 129 0.9 $ (624) (7.1) $ 753 120.7
======== ======== ========= ========= =======
Personnel costs were $7.0 million for the second quarter of 2003, an
increase of $2.5 million or 54.7% over $4.5 million for the second quarter of
2002. Of the increase, $1.5 million or 60.0% was attributed to growth in the
Domestic platform, which added 119 employees over the comparable prior period.
$0.8 million or 32.0% of the increase was attributed to the International
platform which added 36 employees over the comparable prior period. Personnel
costs as a percentage of net revenue decreased to 49.6% in the second quarter of
2003 from 51.5% in the second quarter of 2002.
Other selling, general and administrative costs were $6.1 million for
the second quarter of 2003, an increase of $2.5 million or 72.1% over $3.5
million for the second quarter of 2002. For the second quarter of 2003, $1.6
million or 63.0% of the increase in other selling, general and administrative
costs was attributed to growth in the Domestic platform while $0.2 million or
8.5% of the increase was attributed to the International platform. As a
percentage of net revenue, other selling, general and administrative costs
increased to 43.0% in the second quarter of 2003 from 40.1% in the first quarter
of 2002.
22
Depreciation and amortization costs were $0.6 million for the second
quarter of 2003, an increase of 9.0% over $0.5 million for the second quarter of
2002 driven principally by the increase in amortizable intangible assets
resulting from our acquisition strategy. As discussed in Note 2 to the unaudited
consolidated financial statements, amortization expense associated with the
customer relationship intangible asset has been revised upward based on the
outcome of our discussions with the SEC.
Income from operations was $0.5 million in the second quarter of 2003,
as compared to $0.2 million for the second quarter of 2002. Income from
operations as a percentage of net revenue increased to 3.3% for the second
quarter of 2003 from 2.4% for the same period in 2002.
Other income, net increased modestly in 2003 compared to 2002. With
quarter over quarter cash balances being reduced as a result of our acquisition
program, interest income remained an insignificant component to the Company's
overall financial performance for the second quarter of 2003 and 2002.
As a result of historical losses related to investments in early-stage
technology businesses, the Company has accumulated federal net operating loss
carryforwards ("NOLs"). Although a portion of this NOL may be subject to
certain limitations, the Company expects it will be able to use approximately
$21.7 million of the NOLs to offset current and future federal taxable income.
As a result, the Company is currently only subject to certain state and local
taxes which are immaterial to the Company's quarterly financial results.
Income from continuing operations was $0.5 million in the second
quarter of 2003, an improvement of $0.2 million over income of $0.3 million in
the second quarter of 2002.
Loss from discontinued operations in the second quarter of 2003
represents the settlement of certain consulting costs related to the Company's
former internet operations and an accrual for the remaining lease payments on a
property which had been sublet to a company that recently vacated the property
and filed for bankruptcy. See Note 10 to the unaudited consolidated financial
statements.
The Company had no preferred stock dividends in the second quarter of
2003 as compared to $0.9 million for the second quarter of 2002 as a result of
the restructuring of our Series C Preferred Stock effective July 18, 2002. See
Note 7 to the unaudited consolidated financial statements.
Net income attributable to common stockholders was $0.1 million in the
second quarter of 2003, an improvement of $0.8 million over a net loss
attributable to common stockholders of $0.6 million in the second quarter of
2002, primarily due to the effect of the $0.9 million preferred stock dividend.
Basic and diluted earnings per common share were $0.01 and $0.0, respectively
for the second quarter of 2003 compared to a loss of $0.03 per basic and diluted
common share for the second quarter of 2002.
23
Six months ended June 30, 2003 compared to six months ended June 30,
2002
The following table compares our historical total revenue, net
transportation revenue and other revenue (in thousands):
Six months ended June 30,
--------------------------------------
2003 2002 Percent
Restated Restated Change
------------ --------- --------
Total revenue $84,906 $41,590 104.2%
======= =======
Transportation revenue $78,362 $38,594 103.0
Cost of transportation 58,617 28,385 106.5
------- -------
Net transportation revenue $19,745 $10,209 93.4
Net transportation margins 25.2% 26.5%
Customs brokerage 4,042 1,748 131.2
Warehousing and other
value added services 2,502 1,248 100.5
------- -------
Total net revenue $26,289 $13,205 99.1
======= =======
Total revenue was $84.9 million in the first six months of 2003, an
increase of $43.3 million or 104.2% over total revenue of $41.6 million in the
first six months of 2002. For the first six months of 2003, $22.6 million, or
52.2%, of the increase in revenues was attributed to growth in the Domestic
platform with an incremental five months of operations of United American
accounting for $9.9 million of the growth; $20.7 million, or 47.8% of the
increase was attributed to growth in the International platform with an
incremental three months of operations of SLIS accounting for $15.4 million of
the growth.
Net transportation revenue was $19.7 million in the first six months of
2003, an increase of $9.5 million or 93.4% over net transportation revenue of
$10.2 million in the first six months of 2002. For the first six months of 2003,
$6.5 million, or 68.4% of the increase in net transportation revenues was
attributed to growth in the Domestic platform while $3.0 million, or 31.6% of
the increase was attributed to growth in the International platform. Net
transportation margins decreased to 25.2% for the first six months of 2003 from
26.5% for the first six months of 2002. This decrease in historical
transportation margins is primarily the result of the additional relative
contribution of our International Services platform which traditionally
generates lower transportation margins.
Net revenue was $26.3 million in the first six months of 2003, an
increase of $13.1 million or 99.1% over net revenue of $13.2 million in the
first six months of 2002. For the first six months of 2003, $7.5 million, or
57.3% of the increase in net revenues was attributed to growth in the Domestic
platform while $5.6 million, or 42.7% of the increase was attributed to growth
in the International platform.
24
The following table compares certain consolidated statement of operations
data as a percentage of our net revenue (in thousands):
Six months ended June 30,
----------------------------------------------------------------------
2003 2002 Change
-------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent
------- ------- -------- -------- --------- -------
Net revenue $26,289 100.0 $ 13,205 100.0 $ 13,084 99.1
------- ------- -------- -------- ---------
Personnel costs 13,566 51.6 7,120 53.9 6,446 90.5
Other selling, general and administrative 10,361 39.4 6,186 46.9 4,175 67.5
Depreciation and amortization 1,161 4.4 966 7.3 195 20.1
Litigation settlement 750 2.9 -- -- 750 NM
------- ------- -------- -------- ---------
Total operating costs 25,838 98.3 14,272 108.1 11,566 81.0
------- ------- -------- -------- ---------
Income (loss) from operations 451 1.7 (1,067) (8.1) 1,518 142.3
Other income, net 84 0.3 108 0.8 (24) (22.0)
------- ------- -------- -------- ---------
Income (loss) from continuing operations before
income taxes 535 2.0 (959) (7.3) 1,494 155.8
Income taxes (58) (0.2) -- -- (58) NM
------- ------- -------- -------- ---------
Net income (loss) from continuing operations 477 1.8 (959) (7.3) 1,436 149.7
Loss from discontinued operations (355) (1.3) -- -- (355) NM
------- ------- -------- -------- ---------
Net income (loss) 122 0.5 (959) (7.3) 1,081 112.7
Preferred stock dividends -- -- (1,780) (13.5) 1,780 100.0
------- ------- -------- -------- ---------
Net income (loss) attributable to common $ 122 0.5 $ (2,739) (20.8) $ 2,861 104.5
stockholders ======= ======= ======== ======== =========
Personnel costs were $13.6 million for the first six months of 2003, an
increase of $6.4 million or 90.5% over $7.1 million for the first six months of
2002. Of the increase, $3.2 million, or 50.0% was attributed to the Domestic
platform, driven primarily by the acquisition of United American in the second
quarter of 2002. However, employees from the United American transaction were
only employed for one month during the first six months of 2002. The
International platform accounted for $3.0 million, or 46.9% of the increase, due
to the acquisition of SLIS in the second quarter of 2002. The employees from the
SLIS acquisition were employed for only three months during the first six months
of 2002. Notwithstanding the nominal dollar growth in personnel costs, as a
percentage of net revenue, personnel costs decreased to 51.6% in the first six
months of 2003 from 53.9% in the first six months of 2002.
Other selling, general and administrative costs were $10.4 million for
the first six months of 2003, an increase of $4.2 million or 67.5% over $6.2
million for the first six months of 2002. For the first six months of 2003, $2.2
million, or 53.4% of the increase in other selling, general and administrative
costs was attributed to growth in the Domestic platform and $1.0 million, or
24.8% of the increase was attributed to the International platform. As a
percentage of net revenue, other selling, general and administrative costs
decreased to 39.4% in the first six months of 2003 from 46.9% in the first six
months of 2002.
25
Depreciation and amortization costs were $1.2 million for the first six
months of 2003, an increase of 20.1% over $1.0 million for the first six months
of 2002 driven principally by the increase in amortizable intangible assets
resulting from our acquisition strategy. As discussed in Note 2 to the unaudited
consolidated financial statements, amortization expense associated with the
customer relationship intangible asset has been revised upward based on the
outcome of our discussions with the SEC.
The litigation settlement in 2003 amounted to $750,000 and represents
payment to settle litigation commenced against the Company in August 2000. The
Company settled the claim for a payment consisting of $400,000 in cash and
$350,000 in Company common stock.
Income from operations was $0.5 million in the first six months of
2003, as compared to a loss of $1.1 million for the first six months of 2002.
Income from operations as a percentage of net revenue increased to 1.7% for the
first six months of 2003 from (8.1)% for the same period in 2002.
Other income, net decreased modestly in 2003 compared to 2002. With six
month over six month cash balances being reduced as a result of our acquisition
program, interest income remained an insignificant component to the Company's
overall financial performance for the first six months of 2003 and 2002.
As a result of historical losses related to investments in early-stage
technology businesses, the Company has accumulated federal NOLs. Although a
portion of this NOL may be subject to certain limitations, the Company expects
it will be able to use approximately $21.7 million of the NOLs to offset current
and future federal taxable income. As a result, the Company is currently only
subject to certain state and local taxes which are immaterial to the Company's
quarterly financial results.
Income from continuing operations was $0.5 million in the first six
months of 2003, an improvement of $1.4 million over a loss of $1.0 million in
the first six months of 2002.
The Company had no preferred stock dividends in the first six months of
2003 as compared to $1.8 million for the first six months of 2002 as a result of
the restructuring of our Series C Preferred Stock effective July 18, 2002. See
Note 7 to the unaudited consolidated financial statements.
Net income attributable to common stockholders was $0.1 million in the
first six months of 2003, an improvement of $2.9 million over a net loss
attributable to common stockholders of $2.7 million in the first six months of
2002 due primarily to the effect of the $1.8 million preferred stock dividend.
Basic and diluted earnings per common share were $0.00 for the first six months
of 2003, compared to a loss of $0.13 per basic and diluted common share for the
first six months of 2002.
Liquidity and Capital Resources
Prior to the adoption of our current business model, our operations
consisted of developing early-stage technology businesses. These operations did
not generate sufficient operating funds to meet our cash needs, and, as a
result, we funded our historic operations with the proceeds from a number of
private placements of debt and equity securities. With the advent of our new
business model, we expect to be able to fund our operations with the cash flow
generated by the subsidiaries we acquire. We are also in an acquisitive mode and
expect to deploy material amounts of capital as we execute our business plan.
Therefore, it is likely that we will need to raise additional capital in the
future. There can be no assurance that we will be able to raise additional
capital on terms acceptable to us, if at all.
26
Cash and cash equivalents totaled $0.4 million and $2.3 million as of
June 30, 2003 and December 31, 2002, respectively. Working capital totaled $6.6
million and $5.3 million at June 30, 2003 and December 31, 2002, respectively.
Cash used in operating activities was $3.8 million for the first six
months of 2003 compared to $3.7 million used in the first six months of 2002.
Net cash used in investing activities during the first quarter of 2003
was $11.5 million compared to $10.4 million in the first quarter of 2002.
Investing activities in 2003 were driven principally by $3.7 million related to
our acquisition of Regroup, approximately $3.5 million in earn-out payments made
in relation to 2002 performance targets in connection with prior acquisitions
and $3.9 million for the purchase of furniture and equipment primarily related
to the roll-out of Tech-Logis(TM), the Company's new web-based technology
platform.
Cash from financing activities in the first six months of 2003 included
a private placement of 4,470,000 shares of our common stock in exchange for
gross proceeds of approximately $6.1 million. This placement yielded net
proceeds of $5.7 million for the Company, after the payment of placement agent
fees and other out-of-pocket costs. Until the Company resolves the issues
surrounding the valuation of its acquired customer relationship intangible
assets, it is not able to file an effective registration statement with respect
to these shares. Under the private placement agreement, the Company became
subject to a penalty provision that requires the Company, beginning July 3, 2003
and again at the end of each 30-day period thereafter, to pay $150,000 to the
shareholders who participated in the private placement.
The Company utilized $5.6 million under the Company's credit line,
principally in connection with payment of earnouts and the acquisition of
Regroup, and it received approximately $2.0 million related to the financing of
certain equipment under a capital lease arrangement.
On July 18, 2002 we completed a private exchange transaction that
eliminated approximately $44.6 million in liquidation value of our Series C
Preferred Stock. The terms of the Series C Preferred Stock would have
significantly constrained our future growth opportunities. In return for
eliminating the Series C Preferred Stock, we issued 1,911,071 shares of common
stock, warrants to purchase 1,543,413 shares of common stock at an exercise
price of $1.00 per share for a term of three (3) years, and a new class of
Series D Convertible Preferred Stock that will convert into 3,607,450 shares of
our common stock no later than December 31, 2004. The terms of the Series D
Convertible Preferred Stock were structured to make it much like a common equity
equivalent in that (1) it receives no dividend; (2) it is subordinated to new
rounds of equity; and (3) it holds a limited liquidation preference (expiring at
the end of 2003). In addition, the holders of the Series D Convertible Preferred
Stock were restricted from selling the common stock received upon conversion of
the Series D Convertible Preferred Stock until July 19, 2003 (or earlier if the
stock traded at or above $4.50) and then are permitted limited resale based on
trading volume through July 19, 2004.
We may also receive proceeds in the future from the exercise of
existing options and warrants. As of June 30, 2003, approximately 16,548,000
options and warrants were outstanding. Of these outstanding securities, there
are approximately 73,000 that have an exercise price of $5.00 per share or
higher. If we exclude those options and warrants from our diluted share count,
our outstanding diluted shares, as adjusted, would be approximately 45,512,000
shares. Excluding options and warrants with an exercise price of $5.00 or
higher, the proceeds received by the Company, if all of the remaining options
and warrants were exercised, would be approximately $15.2 million.
27
We believe that our current working capital and anticipated cash flow
from operations are adequate to fund existing operations. In view of the
outstanding balance under our credit facility, our ability to finance further
acquisitions is limited until we raise additional capital. We may finance
acquisitions, however, using our common stock as all or some portion of the
consideration. In the event that our common stock does not attain or maintain a
sufficient market value or potential acquisition candidates are otherwise
unwilling to accept our securities as part of the purchase price for the sale of
their businesses, we may be required to utilize more of our cash resources, if
available, in order to continue our acquisition program. If we do not have
sufficient cash resources through either operations or from debt facilities, our
growth could be limited unless we are able to obtain such additional capital.
To ensure that we have adequate near-term liquidity, we maintain a
revolving credit facility of $15.0 million (the "Facility") with LaSalle
Business Credit, Inc. that is collateralized by accounts receivable and other
assets of the Company and its subsidiaries. The Facility requires the Company
and its subsidiaries to comply with certain financial covenants that may limit
or otherwise govern the Company's ability to make acquisitions. Advances under
the Facility are available to fund future acquisitions, capital expenditures or
for other corporate purposes. At June 30, 2003, advances plus checks then
outstanding stood at $5.6 million. This amount was subsequently increased to
approximately $11.3 million as of August 14, 2003, to finance the acquisitions
of the Singapore offices of G Link Express Pte. Ltd. and the Cambodia offices of
G Link Express (Cambodia) Pte. Ltd. (collectively "G-Link") and Customs Services
International, Inc. ("CSI"). Thus, we have limited availability under Facility
until we are able to reduce the level of our outstanding advances and are
otherwise limited in our ability to make future acquisitions. We expect that the
cash flow from our existing operations and any other subsidiaries acquired
during the year will be sufficient to support our corporate overhead and some
portion, if not all, of the contingent earn-out payments or other cash
requirements associated with our acquisitions. Therefore, we anticipate that our
primary uses of capital in the near term will be to finance the cost of new
acquisitions and to pay any portion of existing earn-out arrangements that cash
flow from operations is otherwise unable to fund.
The acquisition of Air Plus was completed subject to an earn-out
arrangement of $17.0 million. We agreed to pay the former Air Plus shareholders
installments of $3.0 million in 2003, $5.0 million in 2004, $5.0 million in 2005
and $4.0 million in 2006, with each installment payable in full if Air Plus
achieves pre-tax income of $6.0 million in each of the years preceding the year
of payment. In the event there is a shortfall in pre-tax income, the earn-out
payment will be reduced on a dollar-for-dollar basis to the extent of the
shortfall. Shortfalls may be carried over or carried back to the extent that
pre-tax income in any other pay-out year exceeds the $6.0 million level. Based
upon 2002 performance, former Air Plus shareholders were entitled to receive
$3.0 million, and will have excess earnings of $0.3 million as a carryforward
against future earnings targets. Former Air Plus shareholders elected to receive
$2.6 million in cash with the balance paid in shares of the Company's common
stock in April 2003.
28
On April 4, 2002, we acquired SLIS, a Seattle-based privately-held
company that provides a full range of international air and ocean logistics
services. The transaction was valued at up to $12.0 million, consisting of cash
of $5.0 million paid at the closing and up to an additional $7.0 million payable
over a five year earn-out period based upon the future financial performance of
SLIS. We agreed to pay the former SLIS shareholders a total of $5.0 million in
base earn-out payments in installments of $0.7 million in 2003, $1.0 million in
2004 through 2007 and $0.3 million in 2008, with each installment payable in
full if SLIS achieves pre-tax income of $2.0 million in each of the years
preceding the year of payment (or the pro rata portion thereof in 2002 and
2007). In the event there is a shortfall in pre-tax income, the earn-out payment
will be reduced on a pro rata basis. Shortfalls may be carried over or carried
back to the extent that pre-tax income in any other pay-out year exceeds the
$2.0 million level. The Company has also provided the former SLIS shareholders
with an additional incentive to generate earnings in excess of the base $2.0
million annual earnings target ("SLIS' tier-two earn-out"). Under SLIS' tier-two
earn-out, former SLIS shareholders are also entitled to receive 40% of the
cumulative pre-tax earnings in excess of $10.0 million generated during the
five-year earn-out period subject to a maximum additional earn-out opportunity
of $2.0 million. SLIS would need to generate cumulative earnings of $15.0
million over the five-year earn-out period in order for the former SLIS
shareholders to receive the full $7.0 million in contingent earn-out payments.
Based upon 2002 performance, former SLIS shareholders received $0.7 million on
April 1, 2003, and will have excess earnings of $2.3 million as a carryforward
against future earnings targets.
On May 30, 2002 we acquired United American, a Detroit-based
privately-held provider of expedited transportation services. The United
American transaction provided us with a new time-definite service offering
focused on the automotive industry. The transaction is valued at up to $16.1
million, consisting of cash of $5.1 million paid at closing and a four-year
earn-out arrangement based upon the future financial performance of United
American. We agreed to pay the former United American shareholder a total of
$5.0 million in base earn-out payments in installments of $1.25 million in 2003
through 2006, with each installment payable in full if United American achieves
pre-tax income of $2.2 million in each of the years preceding the year of
payment. In the event there is a shortfall in pre-tax income, the earn-out
payment will be reduced on a dollar-for-dollar basis to the extent of the
shortfall. Shortfalls may be carried over or carried back to the extent that
pre-tax income in any other pay-out year exceeds the $2.2 million level. The
Company has also provided the former United American shareholder with an
additional incentive to generate earnings in excess of the base $2.2 million
annual earnings target ("United American's tier-two earn-out"). Under United
American's tier-two earn-out, the former United American shareholder is also
entitled to receive 50% of the cumulative pre-tax earnings generated by a
certain pre-acquisition customer in excess of $8.8 million during the four year
earn-out period subject to a maximum additional earn-out opportunity of $6.0
million. United American would need to generate cumulative earnings of $20.8
million over the four-year earn-out period in order for the former United
American shareholder to receive the full $11.0 million in contingent earn-out
payments. Based upon 2002 performance, the former United American shareholder
was entitled to receive $0.2 million, which he received in the first quarter of
2003, and has an earnings shortfall of $1.0 million. In future years, earnings
in excess of the $2.2 million earnings target would first be applied against the
$1.0 million shortfall.
On October 1, 2002 we acquired SLGS, a Northern Virginia-based
privately-held provider of expedited domestic and international transportation
services. The SLGS transaction capitalized on SLGS' existing base of government
contract work in the Washington metropolitan area and served as a supplement to
an existing Company-operated facility in that area. The transaction was valued
at up to $1.1 million, consisting of cash of $0.5 million paid at closing, and a
three-year earn-out arrangement. The Company agreed to pay the former SLGS
shareholder $0.2 million for each year in the three-year earn-out period ending
December 31, 2005, based upon the annual net revenue targets of $1.6 million. In
the event there is a shortfall in net revenue, the earn-out payment will be
reduced proportionally to the extent of the shortfall, provided no earn-out
payment shall be made if net revenue for the year falls below $1.0 million.
Shortfalls may be carried over or carried back to the extent that net revenue in
any other pay-out year exceeds the $1.6 million level.
29
On June 20, 2003, through our indirect wholly owned subsidiary, SLGS,
we acquired the business of Regroup Express LLC, a Virginia limited liability
company ("Regroup"). The Regroup transaction enhanced our presence in the
Washington, D.C. market and provided a platform to focus on the logistics needs
of U.S. government agencies and contractors. The transaction was valued at up to
$27.2 million, consisting of cash of $3.7 million and $1.0 million of Company
stock paid at closing, and a five year earn-out arrangement. The Company agreed
to pay the members of Regroup a total of $10.0 million in base earn-out payments
payable in equal installments of $2.5 million in 2005 through 2008, if Regroup
achieves pre-tax income of $3.5 million in each of the years preceding the year
of payment. In the event there is a shortfall in pre-tax income, the earn-out
payment will be reduced on a pro rata basis. Shortfalls may be carried over or
carried back to the extent that pre-tax income in any other pay-out year exceeds
the $3.5 million level. The Company has also provided the former members of
Regroup with an opportunity to earn an additional payment of $2.5 million if
Regroup earns $3.5 million in pre-tax income during the 12 month period
commencing July 1, 2003. In addition, the Company has also provided the former
members of Regroup with an additional incentive to generate earnings in excess
of the base $3.5 million annual earnings target ("Regroup's tier-two earn-out").
Under Regroup's tier-two earn-out, the former members of Regroup are also
entitled to receive 50% of the cumulative pre-tax earnings in excess of $17.5
million generated during the five-year earn-out period subject to a maximum
additional earn-out opportunity of $10.0 million. Regroup would need to generate
cumulative earnings of $37.5 million over the five-year earn-out period in order
for the former members to receive the full $22.5 million in contingent earn-out
payments.
On July 16, 2003, through our indirect wholly owned subsidiary, SLIS,
we acquired the business of CSI, a Miami-based, privately held international
freight forwarder and leading customs broker. The acquisition significantly
enhanced our presence in Miami and provided a powerful platform to service
Central America, South America, and the Caribbean. The transaction was valued at
up to $3.8 million, consisting of cash of $1.4 million paid at the closing and
up to an additional $2.4 million payable over a five year earn-out period based
upon the future financial performance of CSI. We agreed to pay the former CSI
shareholders a total of $2.4 million in base earn-out payments in installments
of $0.2 million in 2004, $0.5 million in 2005 through 2007 and $0.7 million in
2008, with each installment payable in full if CSI achieves pre-tax income of
$0.8 million in each of the years preceding the year of payment (or the pro rata
portion thereof in 2004 and 2008). In the event there is a shortfall in pre-tax
income, the earn-out payment will be reduced on a pro rata basis. Shortfalls may
be carried over or carried back to the extent that pre-tax income in any other
pay-out year exceeds the $0.8 million level.
On August 8, 2003, through two indirect international subsidiaries, we
acquired a seventy (70%) percent interest in the assets and operations of G Link
which provide a full range of international logistics services, including
international air and ocean transportation to a worldwide customer base of
manufacturers and distributors. The G-Link transaction substantially increased
our presence in Southeast Asia and expanded our network of owned offices through
which to deliver global supply chain solutions. The transaction was valued at up
to $6.2 million, consisting of cash of $2.8 million, $0.9 million of the
Company's common stock paid at the closing, a thirty (30%) interest in the
30
subsidiaries which acquired the assets and an additional $2.5 million payable
over a four year earn-out period based upon the future financial performance of
G-Link. We agreed to pay the selling companies a total of $2.5 million in base
earn-out payments in installments of $0.3 million in 2004, $0.6 million in 2005
through 2006 and $1.0 million in 2007, with each installment payable in full if
G-Link achieves pre-tax income of $1.8 million in each of the years preceding
the year of payment (or the pro rata portion thereof in 2003 and 2007). In the
event there is a shortfall in pre-tax income, the earn-out payment will be
reduced on a pro rata basis. Shortfalls may be carried over or carried back to
the extent that pre-tax income in any other pay-out year exceeds the $1.8
million level. As additional purchase price, the Company has also agreed to pay
G-Link for excess working capital estimated at $1.6 million through the issuance
of Company common stock, on a post-closing basis.
We will be required to make significant payments in the future if the
earn-out installments under our various acquisitions become due. While we
believe that a significant portion of the required payments will be generated by
the acquired subsidiaries, 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 following table summarizes our contingent base earn-out payments,
assuming full payout (in thousands)(1)(2):
2004 2005 2006 2007 2008 Total
------- ------- ------- ------- ------- -------
Earn-out payments:
Domestic $ 6,540 $ 9,040 $ 8,050 $ 2,500 $ 2,500 $28,630
International 1,463 2,097 2,097 2,469 735 8,861
------- ------- ------- ------- ------- -------
Total earn-out payments $ 8,003 $11,137 $10,147 $ 4,969 $ 3,235 $37,491
======= ======= ======= ======= ======= =======
Prior year pre-tax earnings targets(3)::
Domestic $ 8,806 $12,306 $12,306 $ 3,500 $ 3,500 $40,418
International 3,060 4,553 4,553 5,609 947 18,722
------- ------- ------- ------- ------- -------
Total pre-tax earnings targets $11,866 $16,859 $16,859 $ 9,109 $ 4,447 $59,140
======= ======= ======= ======= ======= =======
Earn-outs as a percentage of prior year pre-tax earnings targets:
Domestic 74.3% 73.5% 65.4% 71.4% 71.4% 70.8%
International 47.8% 46.1% 46.1% 44.0% 77.6% 47.3%
Combined 67.4% 66.1% 60.2% 54.6% 72.7% 63.4%
----------------
(1) Excludes the impact of prior year's pre-tax earnings carryforwards
(excess or shortfalls versus earnings targets).
(2) During the 2003-2007 earn-out period, there is an additional contingent
obligation related to tier-two earn-outs that could be as much as $18.0
million if the applicable acquired companies generate an incremental
$37.0 million in pre-tax earnings.
(3) Aggregate pre-tax earnings targets presented here identify the uniquely
defined earnings targets of each acquisition and should not be
interpreted to be the consolidated pre-tax earnings of the Company
which would give effect for, among other things, amortization or
impairment of intangibles created in connection with each acquisition
or various other expenses which may not be charged to the operating
groups for purposes of calculating earn-outs.
31
On May 6, 2003, we settled litigation instituted on August 20, 2000 by
Austost Anstalt Schaan, Balmore Funds, S.A. and Amro International, S.A.
Although we believed that the Plaintiffs' claims were without merit, we chose to
settle the matter at that time in order to remove any cloud of uncertainty
created by nominal claims in excess of $20 million, to avoid future litigation
costs and to mitigate the diversion of management attention from operations.
Notwithstanding the settlement, the Company remains subject to one
remaining material legal proceeding that arose prior to our transition to a
logistics business. That proceeding has been identified in our Annual Report on
Form 10-K/A for the year ended December 31, 2002. Although we believe that the
claims asserted in this proceeding are without merit, and we intend to
vigorously defend this matter, there is the possibility that the Company could
incur material expenses in the defense and resolution of this matter.
Furthermore, since the Company has not established any reserves in connection
with such claims, any such liability, if any, would be recorded as an expense in
the period incurred or estimated. This amount, even if not material to the
Company's overall financial condition, could adversely affect the Company's
results of operations in the period recorded.
One of the Company's customers which is the subject of a Chapter 11
proceeding under the Bankruptcy Code paid to the Company approximately $1.3
million of pre-petition indebtedness for shipping and delivery charges pursuant
to an order of a United States Bankruptcy Court authorizing the payment of such
charges. One of the creditors in the Chapter 11 proceeding appealed other orders
of the Bankruptcy Court authorizing the payment of pre-petition indebtedness to
other creditors for other charges and those orders have been reversed by a
United States District Court. The Company's customer has appealed the District
Court's reversal and that appeal is pending. While no action has been taken in
the Bankruptcy Court to challenge the payment made to the Company, if such
action were taken in the future and that action were successful, the Company
could be required to return all or a substantial portion of the payments made by
the customer.
New Accounting Pronouncements
In December 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure," which (i) amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for an entity that voluntarily changes the fair value
based method of accounting for stock-based employee compensation, (ii) amends
the disclosure provisions of SFAS No. 123 to require prominent disclosure about
the effects on reported net income of an entity's accounting policy decisions
with respect to stock-based employee compensation and (iii) amends Accounting
Principles Board Opinion No. 28, "Interim Financial Reporting," to require
disclosure about those effects in interim financial information. Items (ii) and
(iii) in the new requirements of SFAS No. 148 are effective for financial
statements for fiscal years ending after December 15, 2002. The Company has
adopted the disclosure requirements described in items (ii) and (iii).
32
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities," which provides new guidance with respect to the
consolidation of all unconsolidated entities, including special purpose
entities. The adoption of Interpretation No. 46 in 2003 is not expected to
impact the Company's consolidated financial statements as the Company does not
have investments in any unconsolidated variable interest entities.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires an issuer to classify a financial instrument that is within its scope
as a liability. Many of these instruments were previously classified as equity.
SFAS No. 150 affects the issuer's accounting for three types of freestanding
financial instruments: 1) mandatorily redeemable shares, which the issuing
company is obligated to buy back in exchange for cash or other assets;
2) instruments that do or may require the issuer to buy back some of its shares
in exchange for cash or other assets, including put options and forward purchase
contracts; and 3) obligations that can be settled with shares, the monetary
value of which is fixed, tied solely or predominantly to a variable such as a
market index, or varies inversely with the value of the issuer's shares. SFAS
No. 150 does not apply to features embedded in a financial instrument that is
not a derivative in its entirety. The adoption of SFAS No. 150 is not expected
to have a material effect on the Company's consolidated financial position,
results of operations or cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's investment portfolio and its line of credit.
The Company does not have any derivative financial instruments in its investment
portfolio. The Company is averse to principal loss and ensures the safety and
preservation of its invested funds by limiting default risk, market risk and
reinvestment risk. The Company invests its excess cash in institutional money
market accounts. The Company does not use interest rate derivative instruments
to manage its exposure to interest rate changes. If market interest rates were
to change by 10% from the levels at June 30, 2003, the change in interest
expense would have had an immaterial impact on the Company's results of
operations. The Company does not expect any material loss with respect to its
investment portfolio.
Item 4. Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934,
as of the end of the period covered by this report, the Company carried out an
evaluation of the effectiveness of the Company's disclosure controls and
procedures. This evaluation was carried out under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer. Based upon that evaluation, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective. Other than as
discussed in the third paragraph of this Item 4, there have been no significant
changes in the Company's internal controls or in other factors, which could
significantly affect internal controls subsequent to the date the Company
carried out its evaluation.
33
Disclosure controls and procedures are designed to ensure that
information required to be disclosed in Company reports filed or submitted under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in
Company reports filed under the Exchange Act is accumulated and communicated to
management, including the Company's Chief Executive Officer and Chief Financial
Officer as appropriate, to allow timely decisions regarding required disclosure.
At the end of December 2003, it was determined that the Company's
consolidated statements of operations for the last three quarters of fiscal
2002, the first three quarters of fiscal 2003, and for the year ended December
31, 2002 would need to be restated, as a result of an error discovered in the
legacy accounting processes of Stonepath Logistics International Services, Inc.
(f/k/a "Global Transportation Systems, Inc.") and Global Container Line, Inc,
its wholly owned subsidiary. The Company determined that a process error existed
which resulted in the failure to eliminate certain intercompany transactions in
consolidation. This process error had been embedded within the legacy accounting
processes of Global Transportation Systems, Inc. for a period which began
substantially before its acquisition by the Company in April 2002.
The Company believes that the presence of this error, in and of itself,
constitutes a reportable condition as defined under standards established by the
American Institute of Certified Public Accountants. A reportable condition is a
significant deficiency in the design or operation of internal controls, which
could adversely affect an organization's ability to initiate, record, process
and report financial data consistent with the assertions of management in the
financial statements. To specifically respond to this matter, and in general to
meet our obligations under Section 404 of the Sarbanes-Oxley Act of 2002, the
Company has commenced an overall review of its internal controls over financial
reporting. As part of the assessment of its internal controls over financial
reporting, the Company will focus on its recent growth in terms of both size and
complexity, coupled with the fact that its finance and accounting functions are
largely decentralized. Although this review is not yet completed, the Company
has initiated an immediate change in process to correct the error that occurred
and to reduce the likelihood that a similar error could occur in the future.
As of the date of this Report, the Company believes it has a plan that,
when completed, will eliminate the reportable condition described above. There
were no other changes during the fourth quarter ended December 31, 2003 that
have materially affected, or are reasonably likely to materially affect, the
Company's disclosure controls and procedures.
34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Other than as described in the Company's Annual Report on Form 10-K/A
for the year ended December 31, 2002, there have been no material developments
in any of the reported legal proceedings, except as described below.
With respect to the litigation instituted on August 20, 2000 by Austost
Anstalt Schaan, Balmore Funds, S.A. and Amro International, S.A., the parties
entered into a Settlement Agreement with the Company on May 6, 2003, pursuant to
which the controversy has been settled, the litigation withdrawn and mutual
releases executed.
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 overall consolidated financial position, results of operations or
liquidity.
Item 2. Changes in Securities and Use of Proceeds
On April 2, 2003, we issued an aggregate of 254,825 shares of our
common stock to the six (6) former shareholders of Air Plus, each of whom was an
accredited investor, in lieu of approximately $403,000 of the earn-out
obligation that was due to them for 2002. The balance of the earn-out obligation
was paid in cash. The shares were valued, for the purpose of this distribution,
at $1.58 per share, and were issued in a private placement transaction exempt
from the registration requirements of the Securities Act of 1933, pursuant to
Section 4(2) and Rule 506 thereunder, as an issuer transaction not involving a
public offering.
On May 8, 2003, we issued an aggregate of 175,791 shares of our common
stock to the representative of Austost Anstalt Schaan, Balmore Funds, S.A., and
Amro International, S.A., each an accredited investor, in settlement of
outstanding litigation involving the Company. The shares were valued, for the
purpose of this settlement, at $350,000 ($1.99 per share), and were issued in a
private placement transaction exempt from the registration requirements of the
Securities Act of 1933, pursuant to Section 4(2) and Rule 506 thereunder, as an
issuer transaction not involving a public offering.
On June 20, 2003, we issued 367,647 shares of our common stock to
Regroup Express, LLC in partial consideration for the acquisition of the assets
and operations of Regroup Express, LLC. The shares were valued, for the purpose
of the acquisition, at $1 million ($2.82 per share), and were issued in a
private placement transaction exempt from the registration requirements of the
Securities Act of 1933, pursuant to Section 4(2) and Rule 506 thereunder, as an
issuer transaction not involving a public offering.
On June 25, 2003, we issued an aggregate of 75,000 shares of our common
stock to Investec Inc. and one of its former principals, in settlement of the
Company's monetary obligations under an investment banking arrangement entered
into with a predecessor of Investec Inc. during 2001. The shares were valued,
for the purpose of settlement, at $150,000 ($2.00 per share), and were issued in
a private placement transaction exempt from the registration requirements of the
Securities Act of 1933, pursuant to Section 4(2) and Rule 506 thereunder, as an
issuer transaction not involving a public offering.
35
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
We held our Annual Meeting of Stockholders on May 31, 2003. At the
Annual Meeting, our stockholders voted on the following proposals identified in
our Proxy Statement dated April 14, 2003:
(1) Vote for the Election of Directors:
The following directors were elected to serve as members of our Board
of Directors:
For Withheld
--- --------
Dennis Pelino 18,962,173 143,987
J. Douglass Coates 18,979,405 128,155
John Springer 18,980,473 125,687
David R. Jones 18,980,338 125,822
Aloysius T. Lawn, III 18,977,255 128,905
Robert McCord 18,979,405 126,755
(2) Proposal to approve the adoption of the Stonepath Group, Inc. 2003
Employee Stock Purchase Plan:
For Against Uninstructed Abstain
--- ------- ------------ -------
6,136,068 1,091,176 11,852,490 26,426
(3) Proposal to approve amendments to the Stonepath Group, Inc. Amended
and Restated 2000 Stock Incentive Plan to increase the number of shares of the
Company's Common Stock which may be issued thereunder:
For Against Uninstructed Abstain
--- ------- ------------ --------
5,512,798 1,623,146 11,942,490 27,726
36
(4) Proposal to ratify appointment of KPMG LLP as independent auditors
for the Company:
For Against Abstain
--- ------- -------
18,623,300 464,279 18,581
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 2.6, 2.7, 2.8, 4.6 and 4.24 were included within the Form
10-Q/A filed with the SEC on August 28, 2003 and have been omitted from
this filing as they are subject to no modification. Exhibits 31.1, 31.2,
32.1 and 32.2 are included herein:
2.6 Asset Purchase Agreement by and among Stonepath Logistics
Government Services, Inc. (f/k/a "Transport Specialists,
Inc."), Regroup Express L.L.C. and Jed J. Shapiro and Charles
R. Cain, the sole members of Regroup Express L.L.C., dated
June 4, 2003 (1)
2.7 Asset Purchase Agreement by and among Stonepath Holdings (Hong
Kong) Limited, G Link Express Logistics (Singapore) Pte. Ltd.,
G Link Express Pte. Ltd. and the shareholders of G Link
Express Pte. Ltd., dated August 8, 2003 (2)
2.8 Asset Purchase Agreement by and among Stonepath Holdings (Hong
Kong) Limited, G Link Express (Cambodia) Pte. Ltd. and the
shareholders of G Link Express (Cambodia) Pte. Ltd., dated
August 8, 2003 (2)
4.6 Stonepath Group, Inc. Amended and Restated 2000 Stock
Incentive Plan (3)
4.24 Stonepath Group, Inc. 2003 Employee Stock Purchase Plan (3)
31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. (This exhibit shall not
be deemed "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, or otherwise subject to the
liability of that section. Further, this exhibit shall not be
deemed to be incorporated by reference into any filing under
the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended.)
37
32.2 Certification of Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. (This exhibit shall not
be deemed "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, or otherwise subject to the
liability of that section. Further, this exhibit shall not be
deemed to be incorporated by reference into any filing under
the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended.)
--------------------
(1) Incorporated by reference to Registrant's Current Report on Form 8-K dated
June 20, 2003.
(2) Incorporated by reference to Registrant's Current Report on Form 8-K dated
August 8, 2003.
(3) Incorporated by reference to Registrant's Definitive Proxy Statement on
Schedule 14A filed on April 15, 2003.
(b) Reports on Form 8-K
On May 7, 2003, the Company furnished under Item 7- "Financial
Statements, Pro Forma Financial Information and Exhibits" and
Item 9 - "Regulation FD Disclosure" of Form 8-K a copy of its
earnings press release that was issued on May 7, 2003. This release,
which is required under Item 12, "Results of Operations and
Financial Condition", was included under Item 9 pursuant to interim
guidance provided by the SEC.
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Quarterly Report on Form 10-Q/A to be signed
on its behalf by the undersigned thereunto duly authorized.
STONEPATH GROUP, INC.
Date: January 16, 2004 /s/Dennis L. Pelino
-------------------------------------
Dennis L. Pelino
Chief Executive Officer and
Chairman of the Board of Directors
Date: January 16, 2004 /s/Bohn H. Crain
-------------------------------------
Bohn H. Crain
Chief Financial Officer and Treasurer
Date: January 16, 2004 /s/Thomas L. Scully
-------------------------------------
Thomas L. Scully
Vice President and Controller and
Principal Accounting Officer
39