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 March 31, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to ____________________.
Commission file number 0-29413
STONEPATH GROUP, INC.
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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 20,261,443 issued and outstanding shares of the registrant's common
stock, par value $.001 per share, at April 30, 2002.
STONEPATH GROUP, INC.
INDEX
Page
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Part I. Financial Information
Item 1. Financial Statements - Unaudited
Consolidated Balance Sheets at March 31, 2002
and December 31, 2001 ...............................................1
Consolidated Statements of Operations
Three months ended March 31, 2002 and 2001 ..........................2
Consolidated Statements of Cash Flows
Three months ended March 31, 2002 and 2001 ..........................3
Notes to Consolidated Financial Statements ..........................4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ......................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk .........15
Part II. Other Information
Item 1. Legal Proceedings ..................................................15
Item 2. Changes in Securities and Use of Proceeds ..........................16
Item 3. Defaults Upon Senior Securities ....................................16
Item 4. Submission of Matters to a Vote of Security Holders ................16
Item 5. Other Information ..................................................16
Item 6. Exhibits and Reports on Form 8-K ...................................16
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
STONEPATH GROUP, INC.
Consolidated Balance Sheets
(unaudited)
Assets March 31, 2002 December 31, 2001
-------------- -----------------
Current assets:
Cash and cash equivalents $ 12,546,561 $ 15,227,830
Accounts receivable, net 5,429,126 7,303,426
Loans receivable from related parties 58,340 64,589
Prepaid expenses 730,126 618,873
Net assets of discontinued operations 415,845 415,845
------------ ------------
Total current assets 19,179,999 23,630,563
Goodwill 14,437,816 14,437,816
Furniture and equipment, net 1,701,366 1,737,603
Acquired intangibles, net 940,000 970,000
Other assets 318,250 289,574
------------ ------------
$ 36,577,431 $ 41,065,556
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,950,276 $ 5,353,656
Accrued payroll and related expenses 534,595 1,427,315
Accrued expenses 1,314,595 1,590,272
------------ ------------
Total liabilities 4,799,466 8,371,243
------------ ------------
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares authorized;
Series C, convertible, issued and outstanding:
3,824,460 shares in 2002 and 3,750,479 shares in 2001
(Liquidation preference: $45,893,520 at 2002) 3,824 3,750
Common stock, $.001 par value, 100,000,000 shares authorized;
issued and outstanding 20,903,110 shares 20,903 20,903
Additional paid-in capital 211,642,827 210,730,999
Accumulated deficit (179,701,759) (177,849,701)
Deferred compensation (187,830) (211,638)
------------ ------------
Total stockholders' equity 31,777,965 32,694,313
------------ ------------
$ 36,577,431 $ 41,065,556
============ ============
See accompanying notes to consolidated financial statements.
-1-
STONEPATH GROUP, INC.
Consolidated Statements of Operations
(unaudited)
Three months ended March 31,
2002 2001
----------- -----------
Revenue $13,065,560 $ --
Cost of purchased transportation 7,641,536 --
----------- ------------
Net revenues 5,424,024 --
Personnel costs 3,002,225 1,185,837
Other selling, general and administrative costs 3,441,542 499,531
----------- ------------
Loss from continuing operations (1,019,744) (1,685,368)
Interest income 55,457 444,087
----------- ------------
Loss from continuing operations (964,287) (1,241,281)
Loss from discontinued operations -- (7,483,862)
----------- ------------
Net loss (964,287) (8,725,143)
Preferred stock dividends (887,772) (1,428,038)
----------- ------------
Net loss to common stockholders $(1,852,059) $(10,153,181)
=========== ============
Loss per share - basic and diluted:
Continuing operations(1) $ (0.09) $ (0.13)
Discontinued operations -- (0.37)
----------- ------------
Net loss to common stockholders $ (0.09) $ (0.50)
=========== ============
Basic and diluted weighted average common shares outstanding: 20,903,110 20,433,783
=========== ============
(1) Includes effect of preferred stock dividends
See accompanying notes to consolidated financial statements.
-2-
STONEPATH GROUP, INC.
Consolidated Statements of Cash Flows
(unaudited)
Three months ended March 31,
-----------------------------
2002 2001
------ ------
Cash flows from operating activities:
Net loss $ (964,287) $(8,725,143)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 80,680 39,975
Stock-based compensation - continuing operations 47,938 864,067
Discontinued operations - working capital changes and non-cash items -- 7,050,774
Loss on disposal of furniture and equipment 3,362 --
Changes in assets and liabilities:
Accounts receivable 1,874,300 --
Other assets (140,062) 45,251
Accounts payable and accrued expenses (3,571,777) (333,410)
----------- -----------
Net cash used in operating activities (2,569,846) (1,058,486)
----------- -----------
Cash flows from investing activities:
Purchases of furniture and equipment (111,423) --
Proceeds from sale of furniture and equipment -- 28,876
Discontinued operations:
Advances to Affiliate Companies -- (522,000)
Purchase of available for sale securities -- (452,900)
Collections on advances to Affiliate Companies -- 1,000,000
Acquisition of ownership interests in Affiliate Companies -- (200,000)
Proceeds from sale of ownership interests in Affiliate Companies -- 5,979,199
----------- -----------
Net cash (used in) provided by investing activities (111,423) 5,833,175
----------- -----------
Cash flows from financing activities: -- --
----------- -----------
Net cash provided by financing activities -- --
----------- -----------
Net (decrease) increase in cash and cash equivalents (2,681,269) 4,774,689
Cash and cash equivalents at beginning of year 15,227,830 29,099,651
----------- -----------
Cash and cash equivalents at end of period $12,546,561 $33,874,340
=========== ===========
See accompanying notes to consolidated financial statements.
-3-
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2002
(1) Nature of Operations and Basis of Presentation
Stonepath Group, Inc. and its subsidiaries (the "Company") is a
non-asset based provider of third party logistics services, offering a
full range of time-definite transportation and distribution solutions.
The Company's strategic objective is to build a leading global
logistics services organization that integrates its established
operating businesses and innovative technologies.
On October 5, 2001, the Company acquired all of the issued and
outstanding common shares of M.G.R, Inc., d/b/a Air Plus Limited,
Distribution Services, Inc. and Contract Air, Inc. (collectively
referred to as "Air Plus") which provide a variety of logistics
services throughout the United States, Canada and Puerto Rico. The
acquisition was accounted for as a purchase and accordingly, the
results of operations and cash flows of Air Plus are included in the
accompanying consolidated financial statements prospectively from the
date of acquisition.
On April 4, 2002, the Company acquired all of the issued and
outstanding common shares of Global Transportation Services, Inc.
("Global"), a Seattle-based provider of international air and ocean
logistics services, for $5,000,000 in cash, plus contingent
consideration of up to an additional $7,000,000 payable over five years
based on Global's future financial performance. With the closing of the
transaction, the Company established its international platform for
services between the Far East, the United States and Europe. The Global
transaction is not reflected in the accompanying consolidated financial
statements.
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
consolidated financial statements should be read in conjunction with
the Company's Annual Report on Form 10-K filed with the SEC on March
29, 2002. Interim operating results are not necessarily indicative of
the results for a full year because our operating results are subject
to seasonal trends when measured on a quarterly basis. Our first and
second quarters are likely to be weaker as compared with our other
fiscal quarters, which we believe is consistent with the operating
results of other supply chain service providers.
(2) Discontinued Operations
From inception through the first quarter of 2001, the Company's
principal business strategy focused on the development of early-stage
technology businesses with significant Internet features and
applications.
On December 28, 2001, the Board of Directors approved a plan to dispose
of all of the assets related to the Company's former business of
investing in early-stage technology companies, since these investments
were incompatible with the Company's current strategy of building a
global integrated logistics services organization. The Company intends
to complete the plan within fiscal 2002. Therefore, for financial
reporting purposes, the assets, liabilities, results of operations and
cash flows of the former business have been segregated from those of
the continuing operations and are presented in the Company's
consolidated financial statements as discontinued operations. The
financial statements of prior periods have been reclassified to reflect
this presentation.
-4-
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2002
(3) Goodwill and Other Intangible Assets - Adoption of SFAS No. 142
The following table reconciles net loss and net loss per share as
reflected in the accompanying consolidated financial statements to the
amounts that would have been reported had Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible
Assets, been adopted as of January 1, 2001. Such adjustments relate
only to discontinued operations.
For the Three Months Ended March 31,
------------------------------------
2002 2001
------ ------
Reported net loss to common stockholders $ (1,852,059) $ (10,153,181)
Add back: Amortization of goodwill related to equity
method investments -- 983,160
------------ -------------
Adjusted net loss to common stockholders $ (1,852,059) $ (9,170,021)
============ =============
Basic and diluted earnings per share:
Reported net loss to common stockholders $ (0.09) $ (0.50)
Goodwill amortization -- 0.05
------------ -------------
Adjusted net loss to common stockholders $ (0.09) $ (0.45)
============ =============
(4) Commitments and Contingencies
On August 22, 2000, Austost Anstalt Schaan, Balmore Funds, S.A. and
Amro International, S.A., purchasers of the Company's convertible
promissory notes, filed suit against the Company in the United States
District Court for the District of Delaware. The plaintiffs allege
that, contrary to a covenant in the subscription agreement they
executed which required the Company to "use reasonable commercial
efforts to register" the shares of its common stock underlying the
convertible promissory notes "at some future date," the Company
verbally agreed to register such shares in the first registration
statement it filed with the SEC subsequent to the transaction. The
plaintiffs assert claims for breach of contract and the duty of good
faith and fair dealing, fraud, violation of federal securities laws,
estoppel, and reformation and seek damages in excess of $20,000,000,
plus attorneys' fees and costs. In response to a motion to dismiss
filed by the Company, the Court dismissed the federal securities law
and estoppel claims and denied the motion as to all other claims. The
Company believes it has meritorious defenses to the remaining claims
and intends to defend the matters vigorously.
On April 15, 2002, the United States District Court for the Southern
District of New York entered an order granting the motion to dismiss
Emergent Capital Investment Management'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. The Company believes that it has
meritorious defenses to the plaintiff's claims and intends to
vigorously defend this action.
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.
On February 28, 2002, the Company modified the existing employment and
option agreements with its Chairman and CEO. The amended option
agreement provides for accelerated vesting of the options originally
granted to the CEO on June 21, 2001, on the occurrence of certain
triggering events, such as the death, disability or termination of
employment of the CEO. Should any of those triggering events occur
prior to June 21, 2005, the Company may be required to reflect in its
statement of operations a non-cash compensation charge. Based on the
price of the Company's common stock on the date of modification, the
maximum amount of the potential charge is approximately $870,000.
-5-
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2002
(5) 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 of $1,305,240.
The Series C Shares are 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, and (ii) any payment default continuing for at least 120
days where the amount in default is greater than $750,000.
During the three month periods ended March 31, 2001 and 2002, the
Series C holders earned 72,139 and 73,981 shares from payment of
dividends. At March 31, 2002 there were 3,824,460 Series C Shares
outstanding.
The Company 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. The
Company allocated $7,391,673 of the net proceeds received from this
offering to the cost of the Series C Warrants based on a Black-Scholes
option-pricing model.
In February 2001, the Company received the consent from the holders of
more than two thirds of its then 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,
the Company was limited to use the proceeds to investments in
early-stage Internet companies.
In exchange for this consent, and subject to the condition described
below, the Company agreed that it would, as of July 18, 2002:
(i) issue to the holders of the then outstanding Series C
Shares, 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 a
target price (the "Target Price") equal to 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 number of such warrants to be
issued will be that number which, assuming all of the
Series C Preferred Stock is converted and all warrants to
purchase 416,667 shares of Common Stock issued in
conjunction with the issuance of the Series C Preferred
Stock and all Series C Contingent Warrants are exercised,
is sufficient to reduce the average cost of the holders'
investment in the Company to the Target Price; 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)
March 31, 2002
(5) Preferred Stock (continued)
Preferred Stock Dividends
The components of preferred stock dividends are as follows:
Three months ended March 31,
----------------------------
2002 2001
---------- -----------
Series C Preferred Stock dividend
payable in kind $ 887,772 $ 865,668
Issuance of contingent warrants -- 562,370
---------- -----------
$ 887,772 $ 1,428,038
========== ===========
The Series C Preferred Stock dividend is payable in additional Series
C Shares on a quarterly basis and therefore does not represent a cash
obligation of the Company.
(6) Deferred Compensation
The components of deferred compensation are as follows:
Balance at beginning of year $211,638
Additions to deferred compensation 24,130
Amortization to stock-based compensation (47,938)
--------
Balance at March 31, 2002 $187,830
========
Stock-based compensation is reflected in the accompanying consolidated
financial statements as follows:
Three months ended March 31
----------------------------
2002 2001
----------- -----------
Personnel costs $ 47,938 $ 864,067
Loss from discontinued operations -- 370,993
--------- -----------
Total $ 47,938 $ 1,235,060
========= ===========
(7) Loss per Share
Basic and diluted net loss per common share have been computed using
the weighted-average number of shares of common stock outstanding
during the period. Shares associated with stock options, stock
warrants, 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 net loss per
common share calculation are 13,892,061 and 14,154,172 at March 31,
2002 and 2001, 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.
-7-
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2002
(8) Subsequent Events
On April 9, 2002, we agreed to acquire United American Freight
Services, Inc. ("United American"), a Detroit-based privately held
provider of expedited transportation services. The United American
transaction, once completed, will provide us with a new time-definite
service offering focused on the automotive industry. The transaction is
valued at up to $16,100,000, consisting of $5,100,000 in cash at the
closing and a four-year earn-out arrangement based upon the future
financial performance of United American. The transaction is expected
to close by no later than June 2002, and is subject to customary
closing conditions, including the completion of audited financial
statements for United American. At closing, the Company expects to pay
for the acquisition using its currently existing funds.
-8-
CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, regarding future
results, levels of activity, events, trends or plans. We have based these
forward-looking statements on our current expectations and projections about
such future results, levels of activity, events, trends or plans. These
forward-looking statements are not guarantees and are subject to known and
unknown risks, uncertainties and assumptions about us that may cause our actual
results, levels of activity, events, trends or plans to be materially different
from any future results, levels of activity, events, trends or plans expressed
or implied by such forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as "may", "will" "should",
"could", "would", "expect", "plan", "anticipate", "believe", "estimate",
"continue", or the negative of such terms or other similar expressions. While it
is impossible to identify all of the factors that may cause our actual results,
levels of activity, events, trends or plans to differ materially from those set
forth in such forward-looking statements, such factors include the inherent
risks associated with: (i) our limited operating history within the logistics
industry, (ii) our historic losses and our ability to achieve operating
profitability within the logistics industry; (iii) our ability to identify,
acquire, integrate and profitably manage additional businesses; (iv) our ability
to obtain the additional capital necessary, either through operations or from
financings, to implement our acquisition strategy and satisfy our acquisition
obligations;(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 possible upon the
conversion or exercise of outstanding convertible securities, including the
outstanding shares of our Series C preferred stock which are likely to be
converted during the third quarter of 2002;(vii) our dependence on certain large
customers; (viii) our dependence on 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 our operations,
(xiii) general economic conditions, and (xiv) other factors which may be
identified from time to time in our Securities and Exchange Commission filings
and other public announcements. We have assumed, for the purpose of our
forward-looking statements, that each of our operating companies will achieve,
on a stand alone basis, that level of net income necessary to fully achieve the
earn-outs under their respective acquisition agreements. There can be no
assurance that these and other factors will not affect the accuracy of such
forward-looking statements. Certain of the statements made in this quarterly
report which refer to United American Freight Services, Inc. ("United American")
or the expected financial performance of the Company after it acquires United
American assume that the transaction will close in accordance with our
expectations and also rely upon unaudited internal financial information
provided to the Company by United American. There can be no assurance that upon
subsequent audit, adjustments may not be required. These adjustments could
materially affect the financial information assumed with respect to the future
operations of United American. 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.
-9-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
We are a non-asset based provider of third-party logistics services,
offering a full range of time-definite transportation and distribution
solutions. We manage and arrange the domestic and international movement of raw
materials, supplies, components and finished goods for our customers as their
outsourced logistics solution. These services are offered through our domestic
and international air and ground freight forwarding business. In addition to our
time-definite transportation services, we also provide a broad range of value
added supply chain management services including customs brokerage, warehousing,
order fulfillment and inventory management. We service a customer base of
manufacturers, distributors and national retail chains through a network of
offices in 15 major metropolitan areas in North America and Puerto Rico and an
extensive network of over 200 independent carriers. Through our international
platform, we manage our customers' supply chains throughout the world through
the headquarters of our Global Transportation Services, Inc. ("Global"), in
Seattle, logistics centers in Los Angeles, Chicago and Minneapolis, and through
an array of international agent partners.
Our strategic objective is to build a leading global logistics services
organization that integrates established operating businesses and innovative
technologies. We plan to achieve this objective by broadening our platform of
service offerings through a combination of synergistic acquisitions and the
organic expansion of our existing base of operations. We are currently pursuing
an aggressive acquisition strategy to enhance our position in our current
markets and to acquire operations in new markets. The focus of this strategy is
on acquiring businesses that have demonstrated historic levels of profitability,
have a proven record of delivering high quality services, a customer base of
large and mid-sized companies and which otherwise may benefit from our long term
growth strategy and status as a public company.
Our strategy has been designed to take advantage of shifting market
dynamics. The third party logistics industry continues to grow as an increasing
number of businesses outsource their logistics functions to more cost
effectively manage and extract value from their supply chains. Also, the
industry is positioned for further consolidation as it remains highly
fragmented, and as customers are demanding the types of sophisticated and broad
reaching service offerings that can more effectively be handled by larger more
diverse organizations. As a non-asset based provider of third party logistics
services, we can focus on optimizing the transportation solution for our
customers, rather than on our own asset utilization. Our non-asset based
approach allows us to maintain a high level of operating flexibility and
capitalize on 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. Second, the continued availability of capital and
financing resources sufficient to complete these acquisitions. Our growth
strategy relies upon a number of factors, including our ability to efficiently
integrate the businesses of the companies we acquire, generate the anticipated
economies of scale from the integration, and maintain the historic sales growth
of the acquired businesses so as to generate organic organizational growth. The
business risks associated with these factors are mentioned above under our
"Cautionary Statement for Forward-Looking Statements" and discussed at Item 1 of
our Annual Report on Form 10-K for the year ended December 31, 2001, under the
heading "Risks Particular to our Business."
On October 5, 2001, we acquired Air Plus Limited ("Air Plus"), a group
of Minneapolis-based privately held companies that provide a full range of
logistics and transportation services. The Air Plus acquisition established our
domestic logistics platform. The total value of the transaction was $34.5
million, consisting of cash of $17.5 million paid at closing and a four-year
earn-out arrangement based on the future financial performance of Air Plus.
Since this acquisition was accounted for using the purchase method of accounting
for business combinations, our financial statements for the year ended December
31, 2001 included the results of operations of Air Plus for the period from
October 5, 2001 through December 31, 2001.
-10-
On April 4, 2002, we acquired Global, a Seattle-based privately held
company that provides a full range of international air and ocean logistics
services. The Global acquisition established our international logistics
platform. The total value of the transaction was $12.0 million, consisting of
cash of $5.0 million paid at closing and up to an additional $7.0 million
payable over a five year earn-out period based upon the future financial
performance of Global. Since this acquisition was accounted for using the
purchase method of accounting for business combinations, the results of
operations of Global will be included in our consolidated financial statements
commencing in the second quarter of 2002.
On April 9, 2002 we agreed to acquire United American Freight Services,
Inc. ("United American"), a Detroit-based privately held provider of expedited
transportation services. The United American transaction, once completed, will
provide 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 $5.1
million in cash at closing and a four year earn-out arrangement based upon the
future financial performance of United American. The transaction is expected to
close by no later than June 2002, and is subject to customary closing
conditions, including the completion of audited financial statements for United
American as of and for the year ended December 31, 2001.
We have also identified a number of additional companies that may be
suitable acquisition candidates and are in preliminary discussions with a select
number of them.
Our principal source of income is derived from freight forwarding
services. As a freight forwarder, we arrange for the shipment of our customers'
freight from point of origin to point of destination. Generally, we quote our
customers a turn key cost for the movement of their freight. Our price quote
will often depend upon the customer's time-definite needs (first day through
fourth day delivery), special handling needs (heavy equipment, delicate items,
environmentally sensitive goods, electronic components, etc.) and the means of
transport (truck, rail, air or ocean). In turn, we assume the responsibility for
arranging, and the cost of, the underlying means of transportation.
As a non-asset based provider of third party logistics services, we
seek to limit our investment in equipment, facilities and working capital
through contracts and preferred provider arrangements with various
transportation providers who generally provide us with favorable rates, minimum
service levels, capacity assurances and priority handling status. The volume of
our flow of freight enables us to negotiate incentives with our transportation
providers.
Our gross revenue, as it relates to our freight forwarding services,
includes the rate charged to our customers for the movement of their freight.
Our net revenue is the differential between the rate charged to our customers
and our direct cost of transportation. With respect to freight forwarding
services, gross revenues and applicable costs are recognized upon delivery.
We also provide a range of other services, such as customs brokerage,
warehousing services, customized distribution and inventory management services,
fulfillment services and other specific supply chain solutions. Our gross
revenue in these situations is recognized upon performance.
Our operating results are subject to seasonal trends when measured on a
quarterly basis. Our first and second quarters are likely to be weaker as
compared with our other fiscal quarters, which we believe is consistent with the
operating results of other supply chain service providers. This trend is
dependent on numerous factors, including the markets in which we operate,
holiday seasons, consumer demand and economic conditions. Since our revenues are
largely derived from customers whose shipments are dependent upon consumer
demand and just-in-time production schedules, the timing of our revenues are
often out of our control. Factors such as shifting consumer demand for retail
goods and/or manufacturing production delays, could unexpectedly effect the
timing of our revenues. As we increase the scale of our operations, seasonal
trends in one area may be offset to an extent by opposite trends in another
area. We cannot accurately predict the timing of these factors, nor can we
accurately estimate the impact of any particular factor, and thus we can give no
assurance that historical seasonal patterns will continue in future periods.
Discontinued Operations
Prior to the first quarter of 2001, our principal business strategy
focused on the development of early-stage technology businesses with significant
Internet features and applications. Largely as a result of the significant
correction in the global stock markets which began during 2000, and the
corresponding decrease in the valuation of technology businesses and contraction
in the availability of venture financing during 2001, we elected to shift our
business strategy to focus on the acquisition of operating businesses within a
particular industry segment. Following a wind down of the technology business
during the second quarter of 2001, we focused our acquisition efforts
specifically within the transportation and logistics industry.
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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.
Results of Operations
Basis of Presentation
Our results of operations discussed hereafter are presented in a manner
that is intended to provide meaningful data with respect to our ongoing
operations. Accordingly, no prior period analysis has been presented for the
historical quarter ended March 31, 2001, as it would provide no meaningful data
with respect to ongoing operations. We have provided our prior period analysis
using pro forma results of operations, presented as if we had discontinued our
former business model and acquired Air Plus as of January 1, 2001. The pro forma
results reflect a consolidation of the historical results of operations of Air
Plus and Stonepath for the first quarter of 2001 as adjusted to reflect
contractual reduction of officers' compensation at Air Plus and to reflect
amortization of acquired intangibles. The pro forma results exclude losses
associated with the discontinued operations of Stonepath.
Three months ended March 31,
-----------------------------
2002 2001
----------- -----------
(Historical) (Proforma)
Revenues $13,065,560 $13,488,631
Cost of purchased transportation 7,641,536 8,401,706
----------- -----------
Net revenues 5,424,024 5,086,925
Personnel costs 3,002,225 3,455,952
Other selling, general and administrative costs 3,441,542 3,142,889
----------- -----------
Loss from operations (1,019,744) (1,511,916)
Other income 55,457 431,881
----------- -----------
Net loss (964,287) (1,080,035)
Preferred stock dividends (887,772) (1,428,038)
----------- -----------
Net loss to common stockholders from continuing operations $(1,852,059) $(2,508,073)
=========== ===========
Three Months Ended March 31, 2002 compared to the Three Months Ended March 31,
2001 (pro forma)
Gross revenues were $13.1 million in 2002, a decrease of 3.1% compared
to pro forma gross revenues of $13.5 million in 2001. Included in gross revenues
is warehousing and other value-added services income of $0.5 million in 2002 and
$0.5 million in 2001. Net revenues (i.e., gross revenue less purchased
transportation costs of $7.6 million in 2002 and $8.4 million in 2001) improved
to 41.5% of gross revenue in 2002 compared to 37.7% in 2001.
Consolidated personnel costs were $3.0 million for 2002, a decrease of
13.1% from $3.5 million for 2001, and represent payroll, related benefits and
taxes and non-cash charges for Stonepath stand-alone stock-based compensation.
Stock-based compensation expenses amounted to less than $0.1 million in 2002 and
$0.9 million in 2001. Excluding the impact of the year over year reduction for
stock-based compensation, there is a net increase in personnel costs of $0.4
million. On a stand-alone basis, Air Plus' personnel costs increased $0.3
million because of staffing at six new terminals, other staff additions and
normal pay increases. Stonepath stand-alone costs increased $0.1 million due to
changes in management personnel in connection with our new logistics strategy.
Other selling, general and administrative costs include all other
operating expenses including, among other costs, equipment and facility rentals,
professional fees, insurance, travel, general office expenses and depreciation
and amortization. On a consolidated basis, these costs amounted to $3.4 million
in 2002, an increase of 9.5% over $3.1 million in 2001. This net increase in
costs was driven by $0.3 million of incremental expenses incurred at Air Plus
related to the expansion of its historic operations. Costs at Stonepath were
relatively flat compared to the prior year.
Consolidated operating loss was $1.0 million in 2002, an improvement of
$0.5 million from the consolidated operating loss of $1.5 million in 2001. On a
stand-alone basis, Air Plus delivered $0.1 million in income from operations in
2002 compared to $0.2 million in 2001, a reduction of $0.1 million due primarily
to increases in certain selling, general and administrative expenses associated
with the expansion of its historic operations, offset by improved margins. On a
stand-alone basis Stonepath generated an operating loss of $1.1 million for 2002
compared to an operating loss of $1.7 million for 2001 reflecting its transition
away from its strategy to invest in early-stage technology companies.
Other income, which is comprised principally of interest income,
declined in 2002 compared to 2001 due to a lower investment level as a result of
the purchase of Air Plus and continuing costs at Stonepath.
Preferred stock dividends declined to $0.9 million in 2002 from $1.4
million in 2001 primarily as a result of the contingent warrants issued during
the quarter ended March 31, 2001.
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Financial Outlook
Through our acquisitions of Air Plus and Global, we have accomplished
the first step in establishing our domestic and international service platforms.
Our anticipated acquisition of United American is an example of the type of
synergistic "add-on" acquisition we envision in our acquisition strategy. It
will complement and enhance our existing services through new geographic
markets, expansion of our services and a broadened client base.
With the benefit of the United American transaction, it is our
expectation that the Company will deliver annualized pre-tax operating income in
the $4-5 million range on revenues in the $125-$150 million range. Our revenue
estimates are based on the 2001 historical performance of our existing operating
companies and United American. Our pre-tax operating income estimates are based
on the assumption that each of these companies will deliver that level of
pre-tax operating income necessary to fully achieve the earn-outs in their
respective acquisition agreements. In addition, we have factored in our base
corporate costs of approximately $4 million per year, plus the costs associated
with other performance initiatives that could be as much as another $1-2 million
on an annualized basis. Our base corporate costs include the Stonepath level
selling, general and administrative costs. These are the costs that are
generally incurred in support of our overall business model, including the
corporate infrastructure necessary to develop and maintain our acquisition
strategy within the regulated environment of a public corporation. As a
percentage of revenue and net income, our base corporate costs are likely to
decrease as we implement our overall growth strategy. Our performance
initiatives are anticipated to include technology enhancements, the development
of a shared services and integration group and the geographic and numerical
expansion of our sales force.
Given the variable timing associated with the acquisition and
integration of our operating companies, we are expressing our forward-looking
information on an annualized basis. We use the term "annualized" to mean that 12
month roll forward period which includes a full year's results for all of our
acquired companies commencing with the third quarter of 2002.
Notwithstanding our expectations regarding our operating companies and
United American, we can never be certain that future revenue or earnings will be
achieved at any particular level. Estimates of future finance performance are
forward-looking statements. Furthermore, even though we believe these companies
will achieve a certain level of earnings on an annual basis, their results are
subject to seasonal trends. Historically, the results of these companies have
historically been seasonal with their first quarter results lower than other
quarters. Thereafter, volume and income has historically accelerated for the
remainder of the year, with the third and fourth quarters showing the greatest
improvement.
Changes in Financial Position, Liquidity and Capital Resources
Prior to the adoption of our current business model, our operations
consisted of the development of early-stage technology businesses. Those
operations did not generate sufficient operating funds to meet our cash needs,
and, as a result, we funded our historic operations with the proceeds from a
number of private placements of debt and equity securities. With the advent of
our new business model, we expect to be able to fund our operations with the
cash flow generated by the subsidiaries we acquire.
Our funding needs during the past two years have been provided by the
proceeds from the sale of 4,166,667 shares of our Series C Preferred Stock (sold
as a unit with warrants to purchase 416,667 shares of our common stock)
completed during March 2000. This offering yielded net proceeds of $48.3 million
for the Company, after the payment of offering costs. Each share of our Series C
Preferred Stock is convertible into one share of our common stock at any time at
the election of the shareholder. Our Series C Preferred Stock bears a cumulative
dividend of 8% per annum payable in kind on a quarterly basis and has a
liquidation preference of $12.00 per share.
In February 2001, we agreed to modify the economic terms of the Series
C investment. This was done in return for securing the consent from the holders
of our Series C Preferred Stock to permit us to use the proceeds from the Series
C placement 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, the
Series C purchase documents limited the use of proceeds to investment in
early-stage Internet businesses. In connection with this transaction, we agreed
to:
-13-
(i) issue to the holders of our Series C Preferred Stock as of July 18,
2002, warrants to purchase up to a maximum of 3,000,000 shares of our common
stock at an exercise price of $1.00 per share if the then-effective conversion
price of the Series C Preferred Stock is greater than a target price (the
"Target Price") equal to the lesser of (a) $6.00 per share; or (b) the market
price of our common stock at such time (but not less than $5.00 per share). The
number of such warrants to be issued will be that number which, assuming all of
the Series C Preferred Stock is converted and all warrants to purchase 416,667
shares of Common Stock issued in conjunction with the issuance of the Series C
Preferred Stock and all Series C Contingent Warrants are exercised, is
sufficient to reduce the average cost of the holders' investment in the Company
to the Target Price; and
(ii) reduce to $1.00 per share the exercise price of the Series C
warrants held by the holders of our Series C Preferred Stock as of July 18,
2002.
As a condition to receiving the new warrants and the reduction in the
exercise price of the existing warrants, the holders of the Series C Preferred
Stock will convert their shares of preferred stock into shares of our common
stock.
During 2002, operating activities consumed $2.6 million of cash as the
revenues generated through the operations were insufficient to offset operating
expenses.
The Company's working capital was $14.4 million at March 31, 2002, as
compared to $15.3 million at December 31, 2001. The decrease in working capital
is principally attributable to the loss from operations.
Investing activities utilized $0.1 million in 2002 for the purchase of
furniture and equipment. On April 4, 2002, the Company spent $5.0 million for
the acquisition of Global. The Company also expects to spend another $5.1
million at the closing of the pending acquisition of United American.
The Company believes that its current working capital and anticipated
cash flow from operations will be adequate to fund operations for the near term.
However, the Company's aggressive acquisition strategy will require additional
financing in the near term. The Company intends to finance its future
acquisitions primarily through the use of cash, funds from debt facilities, if
and when available, and shares of its common stock or other securities. In the
event that the Company's common stock does not attain or maintain a sufficient
market value or potential acquisition candidates are otherwise unwilling to
accept the Company's securities as part of the purchase price for the sale of
their businesses, the Company may be required to utilize more of its cash
resources, if available, or debt financing, if available, in order to continue
its acquisition program. While it is impossible to predict market prices, the
conversion of our Series C Preferred Stock could cause downward pressure on the
trading price of our common shares should a number of the holders thereof seek
to sell a large number of common shares that are not otherwise adequately
absorbed by the normal trading level of our shares. If the Company does not have
sufficient cash resources through either operations or from debt facilities, its
growth would be limited.
To address its near-term liquidity issues, we are attempting to secure
a revolving credit facility of approximately $15.0 million (the "Facility")
collateralized by the accounts receivable and the other assets of the Company
and its subsidiaries. We expect the Facility to require the Company and its
subsidiaries to meet certain financial objectives and maintain certain financial
covenants. Advances under the Facility would be used to finance future
acquisitions, capital expenditures or for other corporate purposes. We expect
that the cash flow from operations of Air Plus and any other subsidiaries
acquired during the year will be sufficient to support the corporate overhead of
Stonepath and some portion, if not all, of the contingent earn-out payments and
other cash requirements associated with our acquisitions. Therefore, we
anticipate that our primary use of the Facility would 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. While we are in the
advanced stage of negotiating the Facility, there is no assurance that those
negotiations will be successful.
-14-
The acquisition of Air Plus was completed subject to an earn-out
arrangement of up to $17.0 million. We agreed to pay the former Air Plus
shareholders installments of $3.0 million in 2003, $5.0 million in 2004, $5.0
million in 2005 and $4.0 million in 2006, each installment payable in full if
Air Plus achieves pre-tax income of $6.0 million in each of the 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.
The acquisition of Global was completed subject to an earn-out
arrangement of up to $7.0 million. We agreed to pay the former Global
shareholders a base earn-out amount of $1.0 million per year for the five year
period following closing, with each installment payable in full if Global
achieves pre-tax income of $2.0 million in each of the years during the earn-out
period. In the event there is a shortfall in Global's pre-tax income, the
earn-out payment will be reduced on a pro rata basis by the percentage
shortfall. Shortfalls may be carried over or back to the extent that pre-tax
income in any other pay-out period exceeds the $2.0 million level. In addition
to the base earn-out amount, we also agreed to pay the former Global
shareholders an additional earn-out payment in an amount equal to 40% of the
amount by which Global's cumulative pre-tax income over the course of the
earn-out period exceeds $10.0 million, with such payment not to exceed $2.0
million.
On April 9, 2002 we agreed to acquire United American in a transaction
valued at up to $16.1 million, consisting of $5.1 million in cash at the closing
and a four year earn-out arrangement based upon the future financial performance
of United American. The transaction is expected to close by no later than June
2002, and is subject to customary closing conditions, including the completion
of audited financial statements as of and for the year ended December 31, 2001.
We will be required to make significant capital payments in the future
if the earn-out installments under our various acquisitions become due. While we
believe that a significant portion of the required capital will be generated by
the acquired companies, we may have to secure additional sources of capital to
fund some portion of the earn-out payments as they become due. This presents us
with certain business risks relative to the availability and pricing of future
fund raising, as well as the potential dilution to our stockholders if the fund
raising involves the sale of equity.
The Company is also a defendant in a number of legal proceedings.
Although we believe that the claims asserted in these proceedings are without
merit, and we intend to vigorously defend these matters, there is the
possibility that the Company could incur material expenses in the defense and
resolution of these matters. Furthermore, since the Company has not established
any reserves in connection with such claims, any such liability would be
recorded as an expense in the period incurred or estimated. This amount, even if
not material to the Company's overall financial condition, could adversely
affect the Company's results of operations in the period recorded.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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 money
market funds and investment grade securities with remaining maturities of less
than 90 days. 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 the levels at March 31, 2002,
the fair value of our portfolio would decline by an immaterial amount. We do not
invest in derivative financial instruments.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Other than as described in the Company's Annual Report on Form 10-K for
the year ended December 31, 2001, there have been no material developments in
any of the reported legal proceedings except as described below.
With respect to the litigation initiated by Emergent Capital Investment
Management, LLC ("Emergent"), 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. The Company believes that
it has meritorious defenses to the plaintiff's claims and intends to vigorously
defend this action.
-15-
The Company is involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse effect on
the Company's consolidated financial position, results of operations or
liquidity.
Item 2. Changes in Securities and Use of Proceeds
None.
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 Reports on Form 8-K during the
three month period ended March 31, 2002:
(i) Current Report on Form 8-K, dated January 15, 2002. The
Company filed the foregoing Current Report on Form 8-K
reporting under Item 5 the following matters: (A) The
appointment of Bohn Crain as the Company's Chief Financial
Officer; and (B) Notification to the Company's stockholders
under Rule 14a-6(f) of the Securities Exchange Act of 1934
relative to the date for submitting stockholder proposals for
inclusion within the Company's proxy statement for the
Company's annual meeting being held on May 31, 2002.
-16-
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: May 14, 2002 /s/ Dennis L. Pelino
----------------------
Dennis L. Pelino
Chief Executive Officer and
Chairman of the Board of Directors
Date: May 14, 2002 /s/ Bohn H. Crain
-------------------
Bohn H. Crain
Chief Financial Officer
Date: May 14, 2002 /s/ Thomas L. Scully
----------------------
Thomas L. Scully
Treasurer and
Principal Accounting Officer
-17-