UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to ____________________.
Commission file number 0-29413
STONEPATH GROUP, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 65-0867684
-------------------------------------------------------------------------------
(State or Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
Two Penn Center Plaza, Suite 605
Philadelphia, PA 19102
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (215) 564-9193
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
There were 20,487,987 issued and outstanding shares of the registrant's common
stock, par value $.001 per share, at October 31, 2001.
STONEPATH GROUP, INC.
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2001 (Unaudited)
and December 31, 2000 ...............................................1
Consolidated Statements of Operations
Three months and nine months ended September 30, 2001 and
2000(Unaudited) .....................................................2
Consolidated Statements of Cash Flows
Nine months ended September 30, 2001 and 2000 (Unaudited) ...........3
Notes to Consolidated Financial Statements ..........................4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ......................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk .........19
Part II. Other Information
Item 1. Legal Proceedings ..................................................20
Item 2. Changes in Securities and Use of Proceeds ..........................21
Item 3. Defaults Upon Senior Securities ....................................21
Item 4. Submission of Matters to a Vote of Security Holders ................21
Item 5. Other Information ..................................................21
Item 6. Exhibits and Reports on Form 8-K ...................................21
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
STONEPATH GROUP, INC.
Consolidated Balance Sheets
As of September 30, As of December 31,
------------------- ------------------
Assets 2001 2000
------------------- ------------------
(unaudited)
Current assets:
Cash and cash equivalents $ 31,876,170 $ 29,099,651
Available-for-sale securities 57,846 236,389
Interest receivable -- 15,000
Loans receivable from related parties 130,162 217,745
Prepaid expenses 30,375 91,125
------------- -------------
Total current assets 32,094,553 29,659,910
Ownership interests in and advances to Affiliate Companies 1,433,783 14,894,262
Furniture and equipment, net 75,043 228,676
Other assets 382,265 127,655
------------- -------------
$ 33,985,644 $ 44,910,503
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 303,808 $ 889,898
Net liabilities of discontinued operations 695,000 695,000
------------- -------------
Total liabilities 998,808 1,584,898
------------- -------------
Stockholders' equity:
Convertible preferred stock, Series C,
$.001 par value (3,957,669 and 3,970,206 shares authorized at 2001 and
2000; 3,867,544 and 3,657,070 issued and outstanding at 2001 and 2000,
respectively)
Liquidation preference: $46,410,528 at 2001 3,868 3,657
Common stock, $.001 par value (100,000,000 shares authorized at 2001 and 2000;
20,487,987 and 20,419,542 issued and outstanding at 2001 and 2000, respectively) 20,487 20,419
Additional paid-in capital 209,567,588 210,923,329
Accumulated deficit (173,609,522) (156,841,388)
Deferred compensation (2,808,354) (10,771,724)
Accumulated other comprehensive loss (187,231) (8,688)
------------- -------------
Total stockholders' equity 32,986,836 43,325,605
------------- -------------
$ 33,985,644 $ 44,910,503
============= =============
See accompanying notes to consolidated financial statements.
-1-
STONEPATH GROUP, INC.
Consolidated Statements of Operations
(unaudited)
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenue $ -- $ -- $ -- $ --
Operating expenses:
Stock-based compensation 720,516 1,852,424 3,369,406 15,219,173
General and administrative 1,114,774 2,232,038 3,719,941 6,649,241
------------ ------------ ------------ ------------
Total operating expenses 1,835,290 4,084,462 7,089,347 21,868,414
Interest income (326,145) (653,148) (1,175,536) (1,569,094)
Interest expense -- -- -- 84,627
Other losses, net 1,029,850 1,235,447 4,502,696 2,192,548
------------ ------------ ------------ ------------
Loss before equity in losses of Affiliate Companies 2,538,995 4,666,761 10,416,507 22,576,495
Equity in (earnings) losses of Affiliate Companies (16,732) 1,880,520 3,284,609 4,546,276
------------ ------------ ------------ ------------
Net loss from continuing operations 2,522,263 6,547,281 13,701,116 27,122,771
------------ ------------ ------------ ------------
Discontinued operations:
(Gain) loss from discontinued operations -- 157,031 (171,484) 711,707
------------ ------------ ------------ ------------
Net loss $ 2,522,263 $ 6,704,312 $ 13,529,632 $ 27,834,478
============ ============ ============ ============
Basic and diluted loss per share -
continuing operations $ (0.17) $ (0.42) $ (0.83) $ (4.23)
Basic and diluted earnings loss per share -
discontinued operations $ -- $ (0.01) $ 0.01 $ (0.04)
------------ ------------ ------------ ------------
Basic and diluted loss per share $ (0.17) $ (0.43) $ (0.82) $ (4.27)
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
-2-
STONEPATH GROUP, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended September 30,
-------------------------------
2001 2000
------------ ------------
Cash flows from operating activities:
Net loss $(13,529,632) $(27,834,478)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 107,165 962,307
Stock-based compensation 3,369,406 15,219,173
Interest paid with stock -- 216,511
Other losses, net 4,502,696 2,155,048
Equity in losses of Affiliate Companies 3,284,609 4,546,276
(Gain) loss from discontinued operations (171,484) 711,707
Changes in assets and liabilities:
Interest receivable 15,000 25,807
Prepaid expenses 60,750 (69,464)
Other assets (254,610) (66,176)
Accounts payable and accrued expenses (414,606) (132,475)
Discontinued operations -- (187,902)
------------ ------------
Net cash used in operating activities (3,030,706) (4,453,666)
------------ ------------
Cash flows from investing activities:
Advances to Affiliate Companies (552,000) (735,000)
Purchase of available for sale securities (452,900) --
Collections on advances to Affiliate Companies 1,000,000 75,000
Acquisition of ownership interests in Affiliate Companies (200,000) (12,750,000)
Proceeds from sale of ownership interests in Affiliate Companies 5,979,199 --
Proceeds from sale of furniture and equipment 32,926 --
Loans made -- (350,000)
Purchases of furniture and equipment -- (234,616)
------------ ------------
Net cash provided by (used in) investing activities 5,807,225 (13,994,616)
------------ ------------
Cash flows from financing activities:
Repayments of notes payable -- (28,281)
Long-term debt payments -- (79,034)
Issuance of warrants -- 1,099,602
Issuance of preferred stock -- 48,274,760
Purchase of treasury stock -- (1,126,582)
Payment of preferred stock dividend, Series B -- (108,464)
------------ ------------
Net cash provided by financing activities -- 48,032,001
------------ ------------
Net increase in cash and cash equivalents 2,776,519 29,583,719
Cash and cash equivalents at beginning of year 29,099,651 3,127,232
------------ ------------
Cash and cash equivalents at end of period $ 31,876,170 $ 32,710,951
============ ============
Cash paid for interest $ -- $ 29,153
============ ============
Cash paid for income taxes $ -- $ 2,586
============ ============
See accompanying notes to consolidated financial statements.
-3-
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2001
(1) Nature of Operations and Basis of Presentation
The principal business strategy of Stonepath Group, Inc. and subsidiaries
("Stonepath" or the "Company") is to build a global logistics services
organization that integrates established operating companies and
innovative technologies. The Company plans to achieve this objective by
growing through a combination of synergistic acquisitions and organic
expansion of operations. The Company completed its first acquisition on
October 5, 2001, by acquiring a Minneapolis based logistics company
specializing in providing time definite air and ground freight
distribution services to shippers and distributors ("Air Plus") (see Note
10). Prior to the first quarter of 2001, Stonepath's principal business
strategy focused on the development of early-stage technology businesses
with significant Internet features and applications that Stonepath refers
to as "Affiliate Companies."
The accompanying unaudited consolidated financial statements were
prepared in accordance with generally accepted accounting principles for
interim financial information. Certain information and footnote
disclosures normally included in financial statements have been condensed
or omitted pursuant to the rules and regulations of the U.S. Securities
and Exchange Commission (the "SEC") relating to interim financial
statements. These statements reflect all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly Stonepath's
financial position, operations and cash flows for the periods indicated.
These consolidated financial statements should be read in conjunction
with the Company's Annual Report on Form 10-K filed with the SEC on April
2, 2001. Interim operating results are not necessarily indicative of the
results for a full year.
The accompanying unaudited consolidated financial statements and related
footnotes include only the results of operations of Stonepath for the
quarterly and nine month period ended September 30, 2001. The financial
results of Air Plus will be included within those of Stonepath's
commencing on the date of acquisition in accordance with the purchase
method of accounting.
(2) Available-For-Sale Securities
Available-for-sale securities are reported at fair value, based on quoted
market prices, with the net unrealized gain or loss reported as a
component of other comprehensive income or loss in stockholders' equity.
At September 30, 2001, available-for-sale securities consist of the
following equity security:
Unrealized
Cost Loss Fair Value
Student Advantage, Inc. $245,077 (187,231) 57,846
======== ======= ======
-4-
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2001
(3) Ownership Interests in and Advances to Affiliate Companies
The following summarizes Stonepath's ownership interests in and advances
to Affiliate Companies at September 30, 2001. All of the Affiliate
Companies are privately held companies.
Excess of carrying
value over equity in Percentage of
Carrying value net assets ownership
-------------- -------------------- -------------
Equity method:
AssetExchange $ 133,783 $108,402 20%
Stonepath Europe -- -- 43%
--------- --------
133,783 $108,402
--------- ========
Cost method:
Brightstreet -- 14%
Metacat -- 19%
E-Quill -- 8%
YesAsia 1,300,000 9%
---------
1,300,000
---------
$1,433,783
=========
Metacat was previously accounted for under the equity method and
beginning in February 2001 was accounted for under the cost method as a
result of our reduced ownership percentage from 47% to 19%.
(4) Preferred Stock
Series C Preferred Stock
In March 2000, the Company sold 4,166,667 shares of its Convertible
Series C Preferred Stock (Series C Shares) at $12 per share for net
proceeds of $48,274,760 after payment of issuing costs consisting of
$1,305,240 and 35,000 Series C Shares valued at $420,000.
Each Series C Share is convertible into one share of the Company's common
stock at any time at the election of the shareholder. This conversion
ratio is subject to adjustment under certain circumstances to protect the
holders of the Series C Shares against future dilutive transactions. The
Series C Shares bear a cumulative dividend of 8% per annum payable in
kind at a deemed value of $12 per share on a quarterly basis, have a
liquidation preference of $12 per share, and require the Company to
reserve 200% of the aggregate number of common shares issuable upon
conversion of the Series C Shares and warrants. The Series C Shares
obligate the Company to redeem the issued and outstanding Series C Shares
within 60 days of receiving written notice from holders of at least 80%
of the then issued and outstanding Series C Shares upon: (i) any
voluntary or involuntary bankruptcy or receivership, (ii) any payment
default continuing for at least 120 days where the amount in default is
greater than $750,000, (iii) a consolidation or merger of the Company
with or into any other person(s) or entity(ies) other than a
consolidation or merger in which the Company is the surviving
corporation, (iv) upon consummation of a sale of all or substantially all
of our assets; and (v) a sale or other disposition of more than 50% of
our voting capital stock. Any such redemption shall be at a price equal
to the greater of (i) the liquidation value of $12 per share plus all
accrued and unpaid dividends, or (ii) the fair market value per share of
the Company's common stock on the redemption date. The Series C Shares
were initially presented as temporary equity in the Company's balance
sheet because the holders of the Series C Shares had redemption rights in
the event that: (i) Stonepath did not register with the SEC the Company's
common shares which the Series C Shares are convertible into, or (ii)
that Stonepath did not file a listing application for the Company's
common shares with a national exchange. The Series C Shares were
subsequently accounted for as permanent equity in June 2000 once the
Company successfully registered the common shares and filed it's listing
application as events which could allow Series C shareholder initiated
redemption are now under the control of the Company.
-5-
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2001
(4) Preferred Stock (continued)
Series C Preferred Stock (continued)
Stonepath issued warrants to purchase an aggregate of 416,667 shares of
common stock (Series C Warrants) in connection with the issuance of the
Series C Shares. The Series C Warrants are exercisable until March 2,
2003 at an exercise price of $26.58 per share of common stock, subject to
adjustment as described below. Stonepath allocated $7,391,673 of the net
proceeds received from this offering to the cost of the Series C Warrants
based on a Black-Scholes option-pricing model. Fair value was estimated
using an expected life of 3 years, no dividends, volatility of 1.138, and
a risk-free interest rate of 6.56%.
In February 2001, the Company received the consent from the holders of
more than two thirds of its issued and outstanding shares of Series C
Shares to modify the use of proceeds provisions as originally defined
within the Series C Preferred Stock Purchase Agreement. As amended, the
Company may now use the proceeds from the sale of the Series C Shares to
make any investments in the ordinary course of our business, as from
time-to-time determined by the Company's Board of Directors, or for any
other business purpose approved by the Board of Directors. Previously,
Stonepath was limited to use the proceeds for investments in early-stage
Internet companies.
In exchange for this consent Stonepath agreed to:
(i) issue to the holders of the Series C Shares as of July 18,
2002, warrants (the Series C Contingent Warrants) to purchase
up to a maximum of 3.0 million shares of the Company's common
stock at an exercise price of $1.00 per share if the
then-effective conversion price of the Series C Shares is
greater than the lesser of (a) $6.00 per share; or (b) the
market price of the Company's common stock at such time (but
not less than $5.00 per share) (the Target Price). The number
of Series C Contingent Warrants to be issued is that number
which, assuming conversion of all Series C Shares and the
exercise of the Series C Warrants and the Series C Contingent
Warrants will reduce the average cost of the holders
investment in us to the Target Price, reduced by the number of
outstanding warrants described below; and
(ii) reduce to $1.00 per share the exercise price of the existing
Series C Warrants to purchase 416,667 shares of the Company's
common stock held by the holders of the Company's Series C
Preferred Shares as of July 18, 2002.
As a condition to receiving the new warrants and the reduction in the
exercise price of the existing Series C Warrants, the holders of the
Series C Shares will be required to convert their Series C Shares into
shares of the Company's common stock on July 18, 2002.
-6-
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2001
(4) Preferred Stock (continued)
Preferred Stock Dividends
The components of preferred stock dividends are as follows:
Three months ended Nine months ended
September 30, September 30,
------------------------- ---------------------------
2001 2000 2001 2000
-------- ---------- ---------- -----------
Series B Preferred Stock cash dividend $ -- $ -- $ -- $ 108,464
Non-cash charge: Series C Preferred
Stock dividend payable in kind 918,660 1,026,905 2,676,132 2,322,739
Non-cash charge: issuance of
contingent warrants -- -- 562,370 --
Non-cash charge: beneficial
conversion feature on Series C Shares -- -- -- 42,608,327
-------- ---------- ---------- ----------
$918,660 $1,026,905 $3,238,502 $45,039,530
======== ========== ========== ==========
The Series B Preferred Stock dividend was paid in cash in February 2000
as the holders converted their Series B Shares into shares of Stonepath's
common stock. The Series C Preferred Stock dividend is payable in
additional Series C Shares on a quarterly basis at a deemed value of $12
per share and does not represent a cash obligation of the Company.
In February 2001 Stonepath agreed to issue the Series C Contingent
Warrants to purchase shares of it's common stock to the holders of the
Company's Series C Shares. As further described above, these warrants are
contingently issuable upon the satisfaction of several criteria relating
to the Series C Shares including requirements over holding period,
conversion, and price. Under the relevant accounting guidance, the
Company recorded a one-time dividend equal to the estimated fair value of
the right to receive the Series C Contingent Warrants. This dividend was
accompanied by a corresponding increase to additional paid in capital
thus leaving the Company's aggregate cash and capital position unchanged.
Additionally, this dividend will not require adjustment in the future
when the amount of the Series C Contingent Warrants are determined and
ultimately issued.
In March 2000, at the time of issuance of the Series C Shares, the then
fair market value of Stonepath's common stock was higher than the Series
C Shares sales price of $12 per share. As the Series C shares are
convertible into shares of Stonepath's common stock, this differential in
price constituted a beneficial conversion feature as defined in Emerging
Issues Task Force Issue No. 98-5, "Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios" (EITF 98-5). Accordingly, Stonepath recorded $42,608,327 as
additional paid in capital for the discount deemed related to a
preferential dividend for the beneficial conversion feature. In
accordance with EITF 98-5, this discount was limited to the proceeds
allocated to the Series C Shares and was recognized immediately as a
preferred stock dividend as the Series C Shares are immediately
convertible. This dividend was accompanied by a corresponding increase to
additional paid in capital thus leaving the Company's aggregate cash and
capital position unchanged.
-7-
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2001
(5) Deferred Compensation
The components of deferred compensation are as follows:
Consultants and
Employees Advisory Board Total
----------- --------------- -----------
Balance at beginning of year $10,679,930 $ 91,794 $10,771,724
Additions to deferred compensation 1,207 19,450 20,657
Cancellations and fair value adjustments (4,756,332) (92,727) (4,849,059)
Amortization to stock-based compensation (3,133,347) (1,621) (3,134,968)
----------- -------- -----------
Balance at September 30, 2001 $ 2,791,458 $ 16,896 $ 2,808,354
=========== ======== ===========
The Company also recorded stock based compensation of $234,438 relating
to investment banking, consulting, and legal services that were paid via
the issuance of options and warrants to purchase 295,000 shares of it's
common stock. Stonepath valued these equity instruments using the
Black-Scholes valuation model on the date of issuance when the
counterparty performance was complete. Fair value was estimated using the
expected life of the equity instruments which ranged from 1.5 to 5 years,
no dividends, volatility of 1.4, and comparable risk-free interest rates
which ranged from 3.72% to 4.78%.
(6) Other Losses, Net
Other losses, net consists of the following:
Three months ended Nine months ended
September 30, September 30,
--------------------------- ----------------------------
2001 2000 2001 2000
---------- ---------- ----------- ----------
Gain on sale of Webmodal holdings $ -- $ -- $(3,617,699) $ --
Gain on sale of College411 holdings -- -- -- (195,088)
Affiliate Company impairment
charges 1,032,400 -- 8,019,270 1,152,189
Litigation settlement -- 1,235,447 -- 1,235,447
Other (2,550) -- 101,125 --
---------- ---------- ----------- ----------
$1,029,850 $1,235,447 $ 4,502,696 $2,192,548
========== ========== =========== ==========
In March 2001, Webmodal, previously an Affiliate Company, was sold to a
wholly owned subsidiary of Enron Global Markets, LLC for $6,990,532 in
cash consisting of $5,979,199 for Stonepath's equity interest in
Webmodal, $1,000,000 as repayment by Webmodal of advances made by the
Company, and $11,333 of accrued interest thereon. The cash consideration
received for Stonepath's equity interest exceeded it's then carrying
value by $3,617,699 and accordingly the Company recorded a gain for that
amount as a result of the sale.
-8-
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2001
(6) Other Losses, Net (continued)
In May 2000, College411 was merged into a wholly owned subsidiary of
Student Advantage, Inc. whereby the College411 stockholders received
.0144 shares of Student Advantage common stock for every share of
College411 common stock which they owned on the date of the merger. As a
result of this merger, Stonepath received 55,621 shares of Student
Advantage's common stock. The fair market value of Student Advantage's
common stock received, based on publicly quoted market prices, was
$245,077, which exceeded the carrying value of our investment in
College411 by $195,088. Accordingly, we recorded a $195,088 gain as a
result of this transaction.
In August 2000, the Company entered into a settlement agreement for its
legal claims with Douglas Spink, the former Chief Technology Officer and
director. The litigation centered on the number of shares of common stock
which Mr. Spink was entitled to following his termination from the
Company. Under the terms of the agreement, Mr. Spink agreed to allow the
Company to reacquire for cancellation 1,212,876 shares of the 2,047,876
common shares originally issued to him. The settlement agreement allowed
Mr. Spink to retain ownership of 835,000 common shares, consisting of
504,532 previously vested shares and an additional 330,468 shares that
vested as part of the settlement. The vesting of these additional 330,468
shares resulted in a charge of $1,197,947 equal to the fair value of such
shares on the date of settlement. Additionally, the Company paid $37,500
in severance to Mr. Spink as required by the settlement agreement.
The Company recorded impairment charges of $8,019,270 and $1,152,189 in
2001 and 2000, respectively, for other than temporary declines in the
fair value of six of its Affiliate Companies and one of its available for
sale securities. From the date of Stonepath's initial acquisition of
ownership interests and subsequent advances and investments, the
Company's funding to these companies represented all or a significant
portion of the outside capital the companies had available to fund their
operations. In September and April 2001, and June 2000, as a result of
the Company's periodic evaluation process, it was determined that these
companies were unlikely to obtain further rounds of financing necessary
to sustain operations and that substantial doubt existed over the
companies' ability to repay advances made. Accordingly, Stonepath
recorded an impairment charge to reduce the remaining carrying value of
the ownership interest in and advances to these companies to zero.
(7) Comprehensive Loss
Excluding net loss, the Company's source of comprehensive income is from
the net unrealized gain or loss on its marketable equity securities which
are classified as available-for-sale. The Company did not provide for a
deferred tax liability at September 30, 2000 relating to the net
unrealized gain as the Company expected to have sufficient net operating
losses to offset any potential tax liability resulting from the sale of
its equity holdings. The following summarizes the components of
comprehensive loss:
Three months ended Nine months ended
September 30, September 30,
------------------------ ------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net loss $(2,522,263) $(6,704,312) (13,529,632) (27,834,478)
Other comprehensive income:
Unrealized gain (loss), net (136,871) 3,447 (178,543) 165,128
----------- ----------- ----------- -----------
Comprehensive loss $(2,659,134) $(6,700,865) (13,708,175) (27,699,350)
=========== =========== =========== ===========
-9-
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2001
(8) Loss per Share
Basic and diluted loss per share are computed using the weighted average
number of common shares outstanding during the period. Shares associated
with stock options, stock warrants, convertible debt, and convertible
preferred stock are not included because the inclusion would be
anti-dilutive (i.e., reduce the net loss per share). The total number of
such shares excluded from the diluted loss per share calculation are
16,278,700 and 12,052,327 at September 30, 2001 and 2000, respectively.
Such securities, had they been dilutive, would have been included in the
computations of diluted loss per share using the treasury stock method,
or the if-converted method, depending on the type of security.
The components of basic and diluted loss per share are as follows:
Three months ended Nine months ended
September 30, September 30,
--------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net loss $ 2,522,263 $ 6,704,312 $13,529,632 $27,834,478
Preferred stock dividends 918,660 1,026,905 3,238,502 45,039,530
----------- ----------- ----------- -----------
Net loss attributable to
common shareholders $ 3,440,923 $ 7,731,217 $16,768,134 $72,874,008
=========== =========== =========== ===========
Weighted average common
shares outstanding 20,480,285 17,984,444 20,463,909 17,060,208
=========== =========== =========== ===========
Basic and diluted loss per
share $ (0.17) $ (0.43) $ (0.82) (4.27)
=========== =========== =========== ===========
(9) Commitments and Contingencies
Other than as described within the Company's Annual Report on Form 10-K
for the year ended December 31, 2000 and the Company's Quarterly Reports
on Form 10-Q for the quarters ended March 31 and June 30, 2001, there
have been no material developments in any of the reported legal
proceedings except as described below.
On October 12, 2000, Emergent Capital Investment Management, LLC (the
Plaintiff) filed suit against the Company and two of its officers
contending that it was misled by statements made by the defendants in
connection with the offering of the Company's Series C Shares which
closed in March 2000. Specifically, the Plaintiff alleges that it is
entitled to rescind the transaction because it was allegedly represented
that the size of the offering would be $20 million and the Company
actually raised $50 million. The Plaintiff seeks a return of its $2
million purchase price of Series C Shares and damages in the amount of
$1.7 million. In June of 2001, the Company moved for summary judgment in
this case.
After the summary judgment motion was filed, the Plaintiff filed a second
action against the Company and two of it's officers alleging different
allegations of fraud in connection with the Series C offering. In the new
complaint, the Plaintiff alleges that oral statements and written
promotional materials distributed by the Company at a meeting in
connection with the Series C offering were materially inaccurate with
respect to the Company's investment in NetValue, Inc., a wholly owned
subsidiary of the Company. The Plaintiff also contends that the
defendants failed to disclose certain allegedly material transactions in
which an officer was involved prior to his affiliation with the Company.
The Company filed a motion to dismiss this new action for failure to
state a claim upon which relief can be granted.
-10-
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2001
On October 2, 2001, the Court entered an order granting summary judgment
to the defendants in the first case filed by the Plaintiff and dismissing
the Plaintiff's second complaint for failure to state a claim upon which
relief can be granted. The Court allowed the Plaintiff 20 days to file a
second amended complaint as to the second action only. On October 21,
2001, the Plaintiff did file a second amended complaint in the second
action. The second amended complaint does not raise any new factual
allegations regarding Plaintiff's participation in the offering. The
Company intends to file a motion to dismiss the second amended complaint.
If the motion is not granted, the Company believes that it has
meritorious defenses to the Plaintiff's claims and intends to vigorously
defend this action.
On August 22, 2000, Austost Anstalt Schaan, Balmore Funds, S.A. and Amro
International, S.A., purchasers of the Company's convertible promissory
notes, filed suit against Stonepath in the United States District Court
for the District of Delaware. The plaintiffs allege that, contrary to the
Company's covenant in the subscription agreement they executed, which
required Stonepath to "use reasonable commercial efforts to register" the
shares of its common stock underlying the convertible promissory notes
"at some future date," the Company verbally agreed to register such
shares in the first registration statement it filed with the Securities
and Exchange Commission subsequent to the transaction. The plaintiffs
assert claims for breach of contract and the duty of good faith and fair
dealing, fraud, violation of federal securities laws, estoppel, and
reformation and seek damages in excess of $20 million, plus attorneys'
fees and costs. In response to a motion to dismiss filed by Stonepath,
the Court dismissed the federal securities law and estoppel claims and
denied the motion as to all other claims. Company believes it has
meritorious defenses to the remaining claims and intends to defend the
matters vigorously.
The Company is also involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of management,
the ultimate disposition of these matters will not have a material
adverse effect on its consolidated financial position, results of
operations or liquidity.
(10) Subsequent Event
On October 5, 2001, Stonepath acquired 100 percent of the outstanding
stock of M.G.R., Inc., d/b/a "Air Plus Limited" and its operating
affiliates, a group of Minneapolis-based privately held companies that
provide a full range of logistics and transportation services
(collectively, "Air Plus"). The total value of the transaction was $34.5
million, consisting of cash of $17.5 million paid at closing and a four
year earn-out arrangement based upon the future financial performance of
Air Plus. The cash component of the transaction was financed through
existing funds of the Company. After completion of the acquisition,
Stonepath will have offices in 14 major metropolitan areas in the United
States and Puerto Rico.
-11-
CAUTIONARY STATEMENT FOR FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements
within the meaning of Section 7A of the Securities Act of 1933 as amended, and
Section 21E of the Securities Exchange Act of 1934. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to known and unknown
risks, uncertainties and assumptions about us and our affiliate companies that
may cause our actual results, levels of activity, performance or achievements to
be materially different from any future results, levels of activity, performance
or achievements expressed or implied by such forward-looking statements. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "could," "would," "expect," "plan," "anticipate," " believe,"
"estimate," "continue," or the negative of such terms or other similar
expressions. Factors that might cause or contribute to such a discrepancy
include, but are not limited to, those in our other Securities and Exchange
Commission filings, including our Registration Statement on Form S-3 filed on
August 10, 2001 with the SEC (File No. 333-64452) and our Annual Report on Form
10-K filed on April 2, 2001. Additional factors that might cause or contribute
to such a discrepancy as they relate to the Company's recent material
acquisition covered by the Company's Current Report on Form 8-K filed October
19, 2001 include:(1) the continued profitable operations of Air Plus in a manner
consistent with its historic results of operations; (2) our ability to leverage
the operations of Air Plus as a platform for an aggressive growth strategy; (3)
the ability to maintain and attract key operating personnel; (4) the reliance of
Air Plus on certain large customers; (5) risks related to our acquisition
strategy; (6) our ability to secure adequate financing to implement our
acquisition strategy; (7) our ability to acquire target companies that satisfy
our acquisition criteria; (8) uncertainty as to whether we can achieve
integration of target companies in a manner intended to take advantage of
overall corporate synergies and result in accretion to consolidated earnings;
and (9) the uncertainty over future trading prices of our stock and the impact
such trading prices may have upon our ability to utilize our common stock to
finance our acquisition strategy.
The following discussion should be read in conjunction with our
Consolidated Financial Statements and related Notes thereto included elsewhere
in this report and in the most recent Annual Report on Form 10-K.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
-----------------------------------------------------------------------
General
Prior to the first quarter of 2001, our principal business strategy
focused on the development of early-stage technology businesses with significant
Internet features and applications. Largely as a result of the significant
correction in the global stock markets commencing during the first quarter of
2001, and the corresponding decrease in the valuation of technology businesses
and contraction in the availability of venture financing, we elected to shift
our business strategy to focus on the acquisition of operating businesses within
a particular industry segment. Our objective was to acquire a controlling
interest in established businesses that historically generated revenues and net
income and demonstrated a reasonable opportunity to achieve significant growth.
We intended to target those businesses whose enterprise value could be enhanced
on a long-term basis through the adoption of e-commerce strategies and other
technologies, the implementation of innovative business practices, the addition
of experienced industry-specific management, or through other traditional means
of increasing efficiency and profitability.
After having evaluated a number of different industries, during the
second quarter of 2001 we focused our acquisition efforts specifically within
the transportation and logistics industry as it:
- continues to demonstrate significant growth characteristics as an
increasing number of businesses outsource their supply-chain
management in order to achieve cost-effective logistics solutions;
- is positioned for further consolidation as many sectors of the
industry remain fragmented; and
- is capable of achieving enhanced efficiencies through the adoption
of e-commerce and other technologies.
-12-
This decision occurred in conjunction with our June 21, 2001,
appointment of Dennis L. Pelino as our Chairman and Chief Executive Officer. Mr.
Pelino brings to us over 25 years of logistics experience, including most
recently, as President and Chief Operating Officer of Fritz Companies, Inc.,
where he was employed from 1987 to 1999.
On October 5, 2001, we completed our first acquisition of a logistics
business by acquiring M.G.R., Inc., d/b/a "Air Plus Limited" and its operating
affiliates, a group of Minneapolis-based privately held companies that provide a
full range of logistics and transportation services (collectively, "Air Plus").
The total value of the transaction was $34.5 million, consisting of cash of
$17.5 million paid at closing and a four year earn-out arrangement based on the
future financial performance of Air Plus.
Through our newly acquired operating subsidiaries, we are a non-asset
based third-party logistics provider, offering a full range of time definite
transportation and distribution solutions. Through an extensive network of
terminals and agents, we manage and arrange the domestic movement of freight
from point of origin to point of destination. These services are offered through
our domestic air and ground freight forwarding business. We also provide
transportation services and a broad range of value added supply chain management
services such as warehousing, order fulfillment and inventory management. We
service a customer base of manufacturers, distributors and national retail
chains through a network of offices in 14 major metropolitan areas in North
America and Puerto Rico and an extensive network of over 200 agents.
Our objective is to build a leading global logistics services
organization that integrates established operating companies and innovative
technologies. We plan to achieve this objective by growing through a combination
of synergistic acquisitions and organic expansion 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 and integrating logistics businesses that are likely to
benefit from our long term growth strategy and status as a public company. A
target candidate will be selected based upon its ability to demonstrate 1)
historic levels of profitability; 2) a proven record of delivering superior time
definite distribution and order fulfillment services; 3) opportunities for
significant growth within strategic segments of our business; and 4) an
established customer base of large and mid-sized companies.
Once acquisitions are completed, we intend to create value for the
acquired company by improving operating margins (through synergies offered by
the consolidation and by access to our technologies) and by enhancing its
potential for organic growth (through increased cross-selling opportunities and
expanded service capabilities). We have identified a number of additional
companies that may be suitable acquisition candidates and are in preliminary
discussions with a select number of them.
The following management's discussion and analysis of financial
condition and results of operations focuses primarily on our former business
strategy since our first acquisition of a logistics business was completed
subsequent to the close of our third quarter. The focus of such future
discussions will primarily be on our new business strategy and the results of
operations of the acquisition(s).
We expect to generate revenues from the operations of Air Plus and from
future acquisitions of logistics businesses. However, through the third quarter
of 2001, our primary source of earnings and losses were realized from the
operating activities of our affiliate companies accounted for under the equity
method of accounting. We also realized income from the sale of our equity
interests equal to the excess of the fair value of the proceeds received from
the sale over our carrying value of the investment at the time of disposition.
Because we acquired interests in early-stage technology companies, many of which
were in the development stage, we have experienced and expect to experience, net
losses as a result of these equity interests. Such losses totaled $3.3 million
and $4.5 million in the nine months ended September 30, 2001 and 2000,
respectively, and are reflected as "equity in losses of affiliate companies"
within our consolidated statements of operations. Also, given the development
stage of our existing affiliate companies, it is unlikely that we will record
significant earnings from their operating activities in the near term. Rather,
the income we derive from our affiliate companies, if any, will more likely be
from sales of our interests in our affiliate companies. This occurred when we
sold our interest in College411 during fiscal 2000, and when we sold our
interest in Webmodal during the first quarter of fiscal 2001.
-13-
Our operating expenses primarily consist of stock-based compensation,
professional fees, depreciation, and salaries and benefits, which totaled
approximately $7.1 million for the first nine months of fiscal 2001. However,
stock-based compensation and depreciation are non-cash charges, and in the first
three quarters of fiscal 2001 we used cash of $3.0 million to fund our operating
expenses. We expect our operating expenses to increase as a result of our first
acquisition of a logistics business.
We have experienced, and may continue to experience, significant
volatility in our quarterly results in certain periods due to non-recurring
transactions and events incidental to our ownership interests in and advances to
affiliate companies. These transactions include dispositions of, and changes to,
our affiliate company ownership interests, and impairment charges. On a periodic
basis, but no less frequently than at the end of each quarter, we evaluate the
carrying value of our ownership interest in and advances to each of our
affiliate companies for possible impairment based on achievement of business
plan objectives and milestones; as well as the financial condition and prospects
of the affiliate company. The business plan objectives and milestones we
consider include those related to financial performance such as achievement of
planned financial results or completion of capital raising activities, and those
that are not primarily financial in nature such as the bringing to market of a
major product or key service. If impairment is determined, the carrying value is
adjusted to fair value. The fair value of our ownership interests in and
advances to privately held affiliate companies is generally determined based on
the value at which independent third parties have invested, or have committed to
invest, in our affiliate companies.
Discontinued Operations
Our consolidated financial statements reflect the operations of Net
Value, Inc., a wholly-owned subsidiary, as a discontinued operation. This was
necessitated when, in November 1999, we made the strategic decision to exit the
development and distribution of online promotional campaign operations of Net
Value, Inc. and sold substantially all of Net Value, Inc.'s assets to
Brightstreet.com. Accordingly, the assets and liabilities of the discontinued
online promotional campaigns have been segregated from continuing operations and
reported as a separate line item in our consolidated financial statements.
-14-
Results of Operations
Three and Nine Months Ended September 30, 2001 compared to the Three and Nine
Months Ended September 30, 2000
We reported a net loss of $2.5 and $13.5 million for the three months
and nine months ended September 30, 2001, ($0.17 and $0.82 loss per basic and
diluted common share) compared to a loss of $6.7 and $27.8 million ($0.43 and
$4.27 loss per basic and diluted common share) in the corresponding periods of
the prior year. The significant reduction in the net loss is primarily
attributable to our change in business strategy and resulting decrease in
development activities associated with our affiliate companies. Our operating
expenses of $1.8 million and $7.1 million for the three and nine month periods
ended September 30, 2001 were significantly lower than our operating expenses of
$4.1 million and $21.9 million for the corresponding periods of the prior year
largely due to the reduction of our workforce and office closures completed
during 2001. Our year to date fiscal 2001 results were also positively impacted
by the sale of Webmodal and the resulting $3.6 million gain. Offsetting the
reduction in operating expenses and Webmodal gain were impairment charges of
$8.0 million and equity in losses of affiliate companies of $3.3 million which
collectively totaled $5.7 million in the corresponding period of the prior year.
The following sections provide in greater detail the individual
components of our results of operations on a line item basis and should be read
in conjunction with our consolidated financial statements and related notes.
Stock-Based Compensation. Stock-based compensation is a non-cash expense
resulting from the amortization of deferred compensation and the issuance of
stock for services and totaled $720,516 and $3,369,406 for the three and nine
months ended September 30, 2001, compared to $1,852,424 and $15,219,173 for the
corresponding periods in 2000. The decrease in stock-based compensation is due
to the reduction of our workforce and our advisory board, and the associated
cancellation of their unvested options resulting in a decrease to deferred
compensation and related reduction in amortization to stock-based compensation.
The following table shows the components of deferred compensation and related
amortization to stock-based compensation for the three months ended September
30, 2001:
Consultants and
Employees Advisory Board Total
---------- --------------- ----------
Balance at beginning of period $3,412,603 $ 34,867 $3,447,470
Cancellations and fair value adjustments -- (17,971) (17,971)
Amortization to stock-based compensation (621,145) -- (621,145)
---------- -------- ----------
Balance at September 30, 2001 $2,791,458 $ 16,896 $2,808,354
========== ======== ==========
-15-
The following table shows the components of deferred compensation and related
amortization to stock-based compensation for the nine months ended September 30,
2001:
Consultants and
Employees Advisory Board Total
---------- --------------- -----------
Balance at beginning of year $10,679,930 $ 91,794 $10,771,724
Additions to deferred compensation 1,207 19,450 20,657
Cancellations and fair value adjustments (4,756,332) (92,727) (4,849,059)
Amortization to stock-based compensation (3,133,347) (1,621) (3,134,968)
----------- -------- -----------
Balance at September 30, 2001 $ 2,791,458 $ 16,896 $ 2,808,354
=========== ======== ===========
We also recorded stock based compensation of $99,371 and $234,438 during the
three and nine months ended September 30, 2001 relating to investment banking,
consulting, and legal services that were paid via the issuance of options and
warrants to purchase shares of our common stock. We valued these equity
instruments using the Black-Scholes valuation model on the vesting date when the
counterparty performance was complete.
Of the total unamortized deferred compensation relating to employees of
$2,791,458, we expect to amortize into stock-based compensation $621,145,
$1,411,831, $642,831, and $115,651 during the remainder of 2001, and during the
years ended December 31, 2002, 2003 and 2004, respectively. These amounts
correspond to the vesting schedule of the underlying stock-based award. The
amount of deferred compensation recorded and related amortization to stock-based
compensation will increase with any future compensatory grants and decrease with
any cancellations. All employee option grants during fiscal 2001 had exercise
prices equal to the fair value of the stock on the date of grant resulting in no
additional deferred compensation.
General and Administrative Expenses. Our general and administrative expenses
have decreased to $1,114,774 and $3,719,941 for the three and nine months ended
September 30, 2001, compared to $2,232,038 and $6,649,241 for the corresponding
periods in 2000. This decrease is attributable to several factors including: a
decline in the level of our investment and corporate activities thereby reducing
our professional fees, and the fiscal 2000 write-off of our goodwill arising
from the Strategicus acquisition thereby reducing depreciation and amortization.
Also contributing to the decline was the closure of our San Francisco and Boston
offices and related workforce reduction occurring in the first quarter of fiscal
2001. We expect our operating expenses to increase as a result of the Air Plus
acquisition completed on October 5, 2001. The following is a schedule of the
significant components that comprise general and administrative expense:
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Professional fees $ 329,052 $ 285,063 $1,381,657 $2,069,213
Salaries and benefits 376,452 542,273 1,265,445 1,544,259
Depreciation and amortization 33,595 299,490 107,165 962,307
Other general and administrative 375,675 1,105,531 965,674 2,073,462
---------- ---------- ---------- ----------
Total $1,114,774 $2,232,038 $3,719,941 $6,649,241
========== ========== ========== ==========
-16-
Interest Income and Expense. Our interest income totaled $326,145 and $1,175,536
for the three and nine months ended September 30, 2001, compared to $653,148 and
$1,569,094 for the corresponding periods in 2000. Interest income consists of
the interest earned on our cash and cash equivalents, with the period over
period decrease due to lower average cash balances and lower interest rates in
fiscal 2001 than in fiscal 2000. We incurred no interest expense in fiscal 2001
versus $84,627 for the first three quarters of fiscal 2000, with the decrease
attributable to the repayment of substantially all outstanding debt in the first
quarter of fiscal 2000.
Other Losses, Net. Other losses, net consist of:
Three months ended Nine months ended
September 30, September 30,
---------------------------- ----------------------------
2001 2000 2001 2000
---------- ---------- ----------- ----------
Gain on sale of Webmodal holdings $ -- $ $(3,617,699) $ --
Gain on sale of College411 holdings -- -- (195,088)
Affiliate Company impairment
charges 1,032,400 -- 8,019,270 1,152,189
Litigation settlement -- 1,235,447 -- 1,235,447
Other (2,550) -- 101,125 --
---------- ---------- ----------- ----------
$1,029,850 $1,235,447 $ 4,502,696 $2,192,548
========== ========== =========== ==========
In March 2001, Webmodal, previously an affiliate company, was sold to a wholly
owned subsidiary of Enron Global Markets, LLC for $6,990,532 in cash consisting
of $5,979,199 for our equity interest in Webmodal, $1,000,000 as repayment by
Webmodal of advances made by Stonepath, and $11,333 of accrued interest thereon.
The cash consideration received for our equity interest exceeded it's then
carrying value by $3,617,699 and accordingly we recorded a gain for that amount
as a result of the sale.
In May 2000, College411 was merged into a wholly owned subsidiary of Student
Advantage, Inc. whereby the College411 stockholders received .0144 shares of
Student Advantage common stock for every share of College411 common stock which
they owned on the date of the merger. As a result of this merger, we received
55,621 shares of Student Advantage's common stock. The fair market value of
Student Advantage's common stock received, based on publicly quoted market
prices, was $245,077, which exceeded the carrying value of our investment in
College411 by $195,088. Accordingly, we recorded a $195,088 gain as a result of
this transaction.
In August 2000, we entered into a settlement agreement for our legal claims with
Douglas Spink, our former Chief Technology Officer and director. The litigation
centered on the number of shares of common stock which Mr. Spink was entitled to
following his termination from the Company. Under the terms of the agreement,
Mr. Spink agreed to allow us to reacquire for cancellation 1,212,876 shares of
the 2,047,876 common shares originally issued to him. The settlement agreement
allowed Mr. Spink to retain ownership of 835,000 common shares, consisting of
504,532 previously vested shares and an additional 330,468 shares vested as part
of the settlement. The vesting of these additional 330,468 shares resulted in a
charge of $1,197,947 equal to the fair value of such shares on the date of
settlement. Additionally, we paid $37,500 in severance to Mr. Spink as required
by the settlement agreement.
We recorded impairment charges of $8,019,270 and $1,152,189 in 2001 and 2000,
respectively, for other than temporary declines in the fair value of six of our
affiliate companies and one of our available for sale securities. From the date
of our initial acquisition of ownership interests and subsequent advances and
investments, our funding to these companies represented all or a significant
portion of the outside capital the companies had available to fund their
operations. In September and April 2001, and June 2000, as a result of our
continuous evaluation process, it was determined that these companies were
unlikely to obtain further rounds of financing necessary to sustain operations
and that substantial doubt existed over the companies' ability to repay advances
made. Accordingly, we recorded an impairment charge to reduce the remaining
carrying value of the ownership interest in and advances to these companies to
zero.
-17-
Equity in earnings (losses) of Affiliate Companies. Equity in earnings (losses)
of affiliate companies for the three and nine months ended September 30, 2001
amounted to $16,732 and ($3,284,609), respectively, compared to ($1,880,520) and
($4,546,276) for the corresponding periods of the prior year. These amounts
represent our proportionate share of the earnings (losses) of our affiliate
companies and the amortization of the excess of the cost of our investment over
our equity interest in the net assets of the affiliate companies accounted for
under the equity method of accounting. Our equity in losses were higher in prior
quarters due to the development and expansion of affiliate company operations
during this period. We expect our earnings (losses) from our investments in
affiliate companies to remain small as we have only one affiliate company
accounted for under the equity method. Also, we intend to acquire controlling
interests in logistics businesses for which we would follow the consolidation
method of accounting.
Discontinued Operations. The gain of $171,484 for the nine months ended
September 30, 2001 represents the settlement of outstanding liabilities arising
from the discontinued operations of Net Value, Inc. We expect to settle the
remaining liabilities on favorable terms.
Changes in Financial Position, Liquidity and Capital Resources
We have historically funded our operations through a combination of equity and
debt proceeds and as of September 30, 2001 had cash and cash equivalents of
approximately $31.9 million. We believe that our existing cash balances will be
sufficient to meet our operating expenses for at least the next twelve months
and for the foreseeable future. We expect to fund our operating expenses from
the cash flows of our logistics subsidiaries and from the sale or cash flows of
our interests in existing affiliate companies. Additionally, we expect to obtain
a bank line of credit to be available to meet any seasonal fluctuations in our
short term liquidity needs.
Our long-term capital needs are dependant, however, primarily on the number and
financial structure of our future acquisitions of logistics businesses and the
extent to which these acquisitions have positive cash flows. On October 5, 2001,
we completed our first acquisition of a logistics business for a total value of
$34.5 million, consisting of cash of $17.5 million paid at closing and a four
year earn-out arrangement based upon the future financial performance of Air
Plus. We paid the cash component of the transaction through our existing funds.
We are also in preliminary discussions with a select number of other potential
acquisition candidates. While we have entered into active negotiations and
preliminary discussions, we are not certain that these negotiations or
discussions will lead to our acquisition of any of these companies. In the
future, we may be required to curtail or reduce the scope of our acquisition
activities to satisfy our long-term liquidity needs. Alternatively, we would be
required to seek additional funds through the sale of our securities to outside
sources of capital, which could result in substantial dilution to stockholders,
or through other means of debt financing. We are not certain that these funds
would be available on terms that are satisfactory to us, or at all.
In the future, we expect our operating activities to generate positive cash
flows from operations as a result of our recent acquisition of Air Plus.
Historically our operating activities involved managing and developing a network
of early stage companies which did not generate sufficient earnings to pay
dividends or otherwise make distributions to us. Although we continue to manage
and provide assistance to six such affiliate companies, we do not expect them to
pay such dividends within the next twelve months given their early stage of
development.
During the nine months ended September 30, 2001, we used $3.0 million to fund
our operating expenses. Our operating expenses will increase as a result of our
recent acquisition and will continue to increase to the extent that we complete
additional acquisitions.
In March 2001, we received $7.0 million from the sale of Webmodal consisting of
$6.0 million for our equity interest and $1.0 million as repayment of
outstanding promissory notes. During the nine months ended September 30, 2001,
we made the following cash investments and advances to affiliate companies:
-18-
January 2001 Webmodal $500,000
February 2001 Metacat 200,000
March 2001 Seedra 22,000
April 2001 SwapIt 30,000
--------
$752,000
========
Impact of Recently Issued Accounting Standards
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 and also specifies the criteria that intangible
assets acquired in a business combination must meet in order to be recognized
and reported apart from goodwill. Statement 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually in accordance with the
provisions of Statement 142. Statement 142 also requires that intangible assets
with definite useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of. We expect to record goodwill of
approximately $15 million as a result of the Air Plus acquisition on October 5,
2001, which will not be amortized due to the adoption of Statements 141 and 142.
Rather, the goodwill will be tested for impairment at least annually in
accordance with the provisions of Statement 142.
In August 2001, the Financial Accounting Standards Board issued FASB Statement
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(Statement 144), which supersedes both FASB Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
(Statement 121) and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions (Opinion 30), for the disposal of a segment of a
business (as previously defined in that Opinion). Statement 144 retains the
fundamental provisions in Statement 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated with
Statement 121. Statement 144 retains the basic provisions of Opinion 30 on how
to present discontinued operations in the income statement but broadens that
presentation to include a component of an entity (rather than a segment of a
business). Unlike Statement 121, an impairment assessment under Statement 144
will never result in a write-down of goodwill. Rather, goodwill is evaluated for
impairment under Statement No. 142, Goodwill and Other Intangible Assets.
The Company is required to adopt Statement 144 no later than the year beginning
after December 15, 2001, and plans to adopt its provisions for the quarter
ending March 31, 2002. Management does not expect the adoption of Statement 144
for long-lived assets held for use to have a material impact on the Company's
financial statements because the impairment assessment under Statement 144 is
largely unchanged from Statement 121. The provisions of the Statement for assets
held for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal activities.
Therefore, management cannot determine the potential effects that adoption of
Statement 144 will have on the Company's financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
------------------------------------------------------------------
Our exposure to market risk relates primarily to changes in interest rates and
the resulting impact on our invested cash. We place our cash with high credit
quality financial institutions and invest that cash in short term fixed income
investments. We are averse to principal loss and ensure the safety and
preservation of our invested funds by investing in only highly rated investments
and by limiting our exposure in any one issuance. If market interest rates were
to increase immediately and uniformly by 10% from levels at September 30, 2001,
the fair value of our portfolio would decline by an immaterial amount. We do not
invest in derivative financial instruments.
-19-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-------------------------
Other than as described within the Company's Annual Report on Form 10-K
for the year ended December 31, 2000 and the Company's Quarterly Reports
on Form 10-Q for the quarters ended June 30 and March 31, 2001, there
have been no material developments in any of the reported legal
proceedings except as described below.
On October 12, 2000, Emergent Capital Investment Management, LLC (the
Plaintiff) filed suit against the Company and two of its officers
contending that it was misled by statements made by the defendants in
connection with the offering of the Company's Series C Shares which
closed in March 2000. Specifically, the Plaintiff alleges that it is
entitled to rescind the transaction because it was allegedly represented
that the size of the offering would be $20 million and the Company
actually raised $50 million. The Plaintiff seeks a return of its $2
million purchase price of Series C Shares and damages in the amount of
$1.7 million. In June of 2001, the Company moved for summary judgment in
this case.
After the summary judgment motion was filed, the Plaintiff filed a second
action against the Company and two of it's officers alleging different
allegations of fraud in connection with the Series C offering. In the new
complaint, the Plaintiff alleges that oral statements and written
promotional materials distributed by the Company at a meeting in
connection with the Series C offering were materially inaccurate with
respect to the Company's investment in NetValue, Inc., a wholly owned
subsidiary of the Company. The Plaintiff also contends that the
defendants failed to disclose certain allegedly material transactions in
which an officer was involved prior to his affiliation with the Company.
The Company filed a motion to dismiss this new action for failure to
state a claim upon which relief can be granted.
On October 2, 2001, the Court entered an order granting summary judgment
to the defendants in the first case filed by the Plaintiff and dismissing
the Plaintiff's second complaint for failure to state a claim upon which
relief can be granted. The Court allowed the Plaintiff 20 days to file a
second amended complaint as to the second action only. On October 21,
2001, the Plaintiff did file a second amended complaint in the second
action. The second amended complaint does not raise any new factual
allegations regarding Plaintiff's participation in the offering. The
Company intends to file a motion to dismiss the second amended complaint.
If the motion is not granted, the Company believes that it has
meritorious defenses to the Plaintiff's claims and intends to vigorously
defend this action.
On August 22, 2000, Austost Anstalt Schaan, Balmore Funds, S.A. and Amro
International, S.A., purchasers of the Company's convertible promissory
notes, filed suit against Stonepath in the United States District Court
for the District of Delaware. The plaintiffs allege that, contrary to the
Company's covenant in the subscription agreement they executed, which
required Stonepath to "use reasonable commercial efforts to register" the
shares of its common stock underlying the convertible promissory notes
"at some future date," the Company verbally agreed to register such
shares in the first registration statement it filed with the Securities
and Exchange Commission subsequent to the transaction. The plaintiffs
assert claims for breach of contract and the duty of good faith and fair
dealing, fraud, violation of federal securities laws, estoppel, and
reformation and seek damages in excess of $20 million, plus attorneys'
fees and costs. In response to a motion to dismiss filed by Stonepath,
the Court dismissed the federal securities law and estoppel claims and
denied the motion as to all other claims. Company believes it has
meritorious defenses to the remaining claims and intends to defend the
matters vigorously.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial position, results of
operations or liquidity.
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Item 2. Changes in Securities and Use of Proceeds
-------------------------------------------------
In July 2001, the Company issued a warrant to purchase 100,000 shares of
it's common stock at an exercise price of $.82 per share, in connection
with advisory services performed by one of the principal holders of our
Series C Preferred Stock. This issuance was exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities
---------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
-----------------------------------------------------------
None.
Item 5. Other Information
-------------------------
None.
Item 6. Exhibits and Reports on Form 8-K
----------------------------------------
(a) The following exhibits are included herein:
None
(b) The Company filed the following Current Report on Form 8-K during the
three month period ended September 30, 2001:
(i) Current Report on Form 8-K, dated August 30, 2001.
The Company filed the foregoing report Current Report on Form 8-K
reporting, under Item 5, the signing of a definitive agreement to
acquire Air Plus Limited and its operating affiliates.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STONEPATH GROUP, INC.
Date: November 13, 2001 /s/ Dennis L. Pelino
----------------------------------
Dennis L. Pelino
Chief Executive Officer and
Chairman of the Board of Directors
Date: November 13, 2001 /s/ Jay Elwell
----------------------------------
Jay Elwell
Treasurer and
Principal Accounting Officer
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