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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
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Amendment No. 2 to Form 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 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: 001-16105
STONEPATH GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 65-0867684
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1600 Market Street, Suite 1515, Philadelphia, PA 19103
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 979-8370
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
Common Stock, par value $.001 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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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 Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) YES [ ] NO [X]
The aggregate market value of the Registrant's common stock held by
non-affiliates of the Registrant as of June 28, 2002 was $21,606,526 based upon
the closing sale price of the Registrant's common stock on the American Stock
Exchange of $1.10 on such date. See Footnote (1) below.
The number of shares outstanding of the Registrant's common stock as of
March 17, 2003 was 27,945,914.
Documents Incorporated by Reference: None
Index to Exhibits appears at page 18 of this Report
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(1) The information provided shall in no way be construed as an admission that
any person whose holdings are excluded from the figure is an affiliate or
that any person whose holdings are included is not an affiliate and any
such admission is hereby disclaimed. The information provided is solely for
record keeping purposes of the Securities and Exchange Commission.
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Explanatory Note
This Form 10-K/A is being filed to restate the consolidated statement
of operations of the Company for the year ended December 31, 2002 included under
Item 8 of Part II, and to make certain conforming changes to the Selected
Financial Data table included under Item 6 of Part II and to the narrative
disclosures included within "Management's Discussion and Analysis of Financial
Condition and Results of Operations" under Items 7 and 7A of Part II. The
restatement is to correct an overstatement of total revenue and cost of
transportation, in like amounts, previously reported by our International
Services division, with no resulting impact on our consolidated net revenue,
EBITDA or net income. A description of the restatement can be found under
Footnote 2 to our consolidated financial statements. The Financial Outlook
section previously included in Item 7 of Part II of our Form 10-K/A has been
omitted as it has been superceded by subsequent guidance provided by us. Except
as otherwise specifically noted, all information contained herein is as of
December 31, 2002 and does not reflect any events or changes in information
that may have occurred subsequent to that date.
This Form 10-K/A is being amended solely to reflect restated financial
information. Accordingly, all other items that remain unaffected are omitted in
this filing.
STONEPATH GROUP, INC.
ANNUAL REPORT ON FORM 10-K/A
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2002
TABLE OF CONTENTS
[INCLUSIVE OF REVISED SECTIONS ONLY]
PART II.................................................................................................................1
Item 6. Selected Financial Data.............................................................................1
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...............3
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........................................16
Item 8. Financial Statements and Supplementary Data........................................................16
PART III...............................................................................................................16
Item 14. Controls and Procedures............................................................................16
PART IV................................................................................................................18
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................18
SIGNATURES.............................................................................................................58
i
PART II
Item 6. Selected Financial Data
The following selected financial data as of and for the dates indicated
has been derived from our consolidated financial statements and the combined
financial statements of our predecessor, Air Plus, and are not complete. You
should read the following selected financial data together with the consolidated
financial statements and related footnotes of the Company, the combined
financial statements and related footnotes of Air Plus and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The selected consolidated statement of operations data of the Company for
each of the years in the three-year period ended December 31, 2002 and the
balance sheet data of the Company as of December 31, 2002 and 2001 are derived
from the Company's consolidated financial statements, revised to reflect the
restatement thereof as more fully discussed in Note 2 to the consolidated
financial statements, that have been audited by KPMG LLP and are included in
this Annual Report on Form 10-K/A. The selected consolidated statement of
operations data of the Company for each of the years in the two-year period
ended December 31, 1999 and the balance sheet data of the Company as of December
31, 2000, 1999 and 1998 are derived from the Company's audited consolidated
financial statements (after reclassification for discontinued operations, as
discussed below) which are not included in this Annual Report on Form 10-K/A.
The selected combined statement of operations data of Air Plus for the
year ended December 31, 2000 is derived from Air Plus' combined financial
statements that have been audited by KPMG LLP and are included in this Annual
Report on Form 10-K/A. The selected combined statement of operations data of Air
Plus for the six months ended June 30, 2001 is derived from Air Plus' combined
financial statements which are unaudited and are included in this Annual Report
on Form 10-K/A.
From inception through the first quarter of 2001, our principal business
strategy focused on the development of early-stage technology businesses with
significant Internet features and applications. In June 2001, we adopted a new
business strategy to build a global integrated logistics services organization
by identifying, acquiring and managing controlling interests in profitable
logistics businesses. On December 28, 2001, the Board of Directors approved a
plan to dispose of all of the assets related to the former business, since the
investments were incompatible with our new business strategy. Accordingly, for
financial reporting purposes, the results of operations of our former line of
business have been accounted for as a discontinued operation and have been
reclassified and reported as a separate line item in the statements of
operations.
1
Consolidated Statement of Operations Data:
(in thousands, except per share amounts)
Stonepath Group, Inc. Air Plus
---------------------------------------------------------------- -------------------------
Year ended December 31,
----------------------------------------------------------------
Six Months Year ended
Restated ended June December
2002 2001 2000 1999 1998 30, 2001 31, 2000
---------- --------- --------- --------- --------- -------- ---------
Revenues $ 122,788 $ 15,598 $ - $ - $ - $ 26,015 $ 56,201
Cost of transportation 84,478 9,741 - - - 15,679 31,856
---------- --------- --------- --------- --------- -------- ---------
Net revenues 38,310 5,857 - - - 10,336 24,345
Operating expenses 35,956 10,409 7,420 2,761 - 9,660 20,544
---------- --------- --------- --------- --------- -------- ---------
Income (loss) from operations 2,354 (4,552) (7,420) (2,761) - 676 3,801
Other income (expense) 128 1,295 2,065 (2,812) - (24) (11)
---------- --------- --------- --------- --------- -------- ---------
Income (loss) from continuing
operations before income taxes 2,482 (3,257) (5,355) (5,573) - 652 3,790
Income taxes 102 - - - - - -
---------- --------- --------- --------- --------- -------- ---------
Income (loss) from continuing
operations 2,380 (3,257) (5,355) (5,573) - 652 3,790
Loss from discontinued operations - (13,863) (30,816) (18,258) (12,737) - -
---------- --------- --------- --------- --------- -------- ---------
Net income (loss) 2,380 (17,120) (36,171) (23,831) (12,737) 652 3,790
Preferred stock dividends 15,020 (4,151) (45,751) (6,605) (15,251) - -
---------- --------- --------- --------- --------- -------- ---------
Net income (loss) attributable to
common stockholders $ 17,400 $ (21,271) $ (81,922) $ (30,436) $ (27,988) $ 652 $ 3,790
========== ========= ========= ========= ========= ======== =========
Basic earnings (loss) per common share:
Continuing operations $ 0.79 $ (0.36) $ (2.89) $ (1.15) $ -
Discontinued operations - (0.68) (1.75) (1.73) (5.94)
---------- --------- --------- --------- ---------
$ 0.79 $ (1.04) $ (4.64) $ (2.88) $ (5.94)
========== ========== ========= ========= =========
Diluted earnings (loss) per common
share:(1)
Continuing operations $ 0.08 $ (0.36) $ (2.89) $ (1.15) $ -
Discontinued operations - (0.68) (1.75) (1.73) (5.94)
---------- --------- --------- --------- ---------
$ 0.08 $ (1.04) $ (4.64) $ (2.88) $ (5.94)
========== ========== ========= ========= =========
Weighted average common shares:
Basic 22,155 20,510 17,658 10,558 4,711
========== ========== ========= ========= =========
Diluted 29,233 20,510 17,658 10,558 4,711
========== ========== ========= ========= =========
Consolidated Balance Sheet Data:
(in thousands)
Stonepath Group, Inc.
December 31,
----------------------------------------------------------------
2002 2001 2000 1999 1998
---------- -------- -------- -------- ---------
Cash and cash equivalents $ 2,266 $ 15,228 $ 29,100 $ 3,127 $ 1
Working capital (deficit) 5,634 15,259 27,713 (4,213) (8,750)
Total assets 55,166 40,803 44,911 13,989 372
Long-term debt and redeemable
preferred stock - - - 4,516 -
Stockholders' equity (deficit) 35,431 32,432 43,326 1,701 (8,750)
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(1) Diluted earnings per common share for 2002 excludes the impact of the July
18, 2002 exchange transaction with the holders of the Company's Series C
Preferred Stock.
2
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Explanatory Note
This Form 10-K/A is being filed to restate our consolidated statement of
operations for the year ended December 31, 2002, and to make certain conforming
changes to the narrative disclosures within "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The restatement is
to correct an overstatement of total revenue and cost of transportation, in like
amounts, previously reported by our International Services division, with no
resulting impact on our consolidated net revenue, EBITDA or net income. A
description of the restatement can be found under Footnote 2 to our consolidated
financial statements. The "Financial Outlook" section contained therein has been
omitted as it has been superceded by subsequent guidance provided by us. Except
as otherwise specifically noted, all information contained herein is as of
December 31, 2002 and does not reflect any events or changes in information that
may have occurred subsequent to that date.
This discussion is intended to further the reader's understanding of our
financial condition and results of operations and should be read in conjunction
with our consolidated financial statements and related notes included elsewhere
herein. This discussion also contains statements that are forward-looking. Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of the risks and uncertainties set forth
elsewhere in this Annual Report and in our other SEC filings. Readers are
cautioned not to place undue reliance on any forward-looking statements, which
speak only as of the date hereof.
Overview
We are a non-asset based third-party logistics services company providing
supply chain solutions on a global basis. We offer a full range of time-definite
transportation and distribution solutions through our Domestic Services platform
where we manage and arrange the movement of raw materials, supplies, components
and finished goods for our customers. These services are offered through our
domestic air and ground freight forwarding business. We offer a full range of
international logistics services including international air and ocean
transportation as well as customs house brokerage services through our
International Services platform. In addition to these core service offerings, we
also provide a broad range of value added supply chain management services,
including warehousing, order fulfillment and inventory management solutions. We
service a customer base of manufacturers, distributors and national retail
chains through a network of offices in 18 major metropolitan areas in North
America, plus two international locations, using an extensive network of over
200 independent carriers and over 150 service partners strategically located
around the world.
As a non-asset based provider of third-party logistics services, we seek
to limit our investment in equipment, facilities and working capital through
contracts and preferred provider arrangements with various transportation
providers who generally provide us with favorable rates, minimum service levels,
capacity assurances and priority handling status. The volume of our flow of
freight enables us to negotiate attractive pricing with our transportation
providers.
Our strategic objective is to build a leading global logistics services
organization that integrates established operating businesses and innovative
technologies. We plan to achieve this objective by broadening our network
through a combination of synergistic acquisitions and the organic expansion of
our existing base of operations. We are currently pursuing an aggressive
acquisition strategy to enhance our position in our current markets and to
acquire operations in new markets. The focus of this strategy is on acquiring
businesses that have demonstrated historic levels of profitability, have a
proven record of delivering high quality services, have a customer base of large
and mid-sized companies and which otherwise may benefit from our long term
growth strategy and status as a public company.
Our acquisition strategy relies upon two primary factors: first, our
ability to identify and acquire target businesses that fit within our general
acquisition criteria and, second, the continued availability of capital and
financing resources sufficient to complete these acquisitions. Our growth
strategy relies upon a number of factors, including our ability to efficiently
integrate the businesses of the companies we acquire, generate the anticipated
economies of scale from the integration, and maintain the historic sales growth
of the acquired businesses so as to generate continued organic growth. The
business risks associated with these factors are discussed at Item 1 of this
Report under the heading "Risks Particular to our Business."
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 turnkey cost for the movement of their freight. Our price quote will
often depend upon the customer's time-definite needs (first day through fifth
day delivery), special handling needs (heavy equipment, delicate items,
environmentally sensitive goods, electronic components, etc.) and the means of
transport (truck, air, ocean or rail). In turn, we assume the responsibility for
arranging and paying for the underlying means of transportation.
We also provide a range of other services including customs brokerage,
warehousing and other services which include customized distribution and
inventory management services, fulfillment services and other value added supply
chain services.
3
Gross revenues represent the total dollar value of services we sell to our
customers. Our cost of transportation includes direct costs of transportation,
including motor carrier, air, ocean and rail services. We act principally as the
service provider to add value in the execution and procurement of these services
to our customers. Our net transportation revenues (gross transportation revenues
less the direct cost of transportation) are the primary indicator of our ability
to source, add value and resell services provided by third parties, and are
considered by management to be a key performance measure. Management believes
that net revenues are also an important measure of economic performance. Net
revenues include transportation revenues and our fee-based activities, after
giving effect to the cost of purchased transportation. In addition, management
believes measuring its operating costs as a function of net revenues provides a
useful metric as our ability to control costs as a function of net revenues
directly impacts operating earnings. With respect to our services other than
freight transportation, net revenues are identical to gross revenues.
Our operating results will be affected as acquisitions occur. Since all
acquisitions are made using the purchase method of accounting for business
combinations, our financial statements will only include the results of
operations and cash flows of acquired companies for periods subsequent to the
date of acquisition. Accordingly, our results of operations only reflect the
operations of: Air Plus for periods subsequent to October 5, 2001; Global for
periods subsequent to April 4, 2002; United American for periods subsequent to
May 30, 2002, and TSI for periods subsequent to October 1, 2002.
Our operating results are also subject to seasonal trends when measured on
a quarterly basis. Our first and second quarters are likely to be weaker as
compared with our other fiscal quarters, which we believe is consistent with the
operating results of other supply chain service providers. This trend is
dependent on numerous factors, including the markets in which we operate,
holiday seasons, consumer demand and economic conditions. Since our revenues are
largely derived from customers whose shipments are dependent upon consumer
demand and just-in-time production schedules, the timing of our revenues is
often beyond our control. Factors such as shifting demand for retail goods
and/or manufacturing production delays, could unexpectedly affect the timing of
our 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.
Critical Accounting Policies
Accounting policies, methods and estimates are an integral part of the
consolidated financial statements prepared by us and are based upon our current
judgments. Those judgments are normally based on knowledge and experience with
regard to past and current events and assumptions about future events. Certain
accounting policies, methods and estimates are particularly sensitive because of
their significance to the consolidated financial statements and because of the
possibility that future events affecting them may differ from our current
judgments. While there are a number of accounting policies, methods and
estimates that affect our consolidated financial statements as described in Note
3 to the consolidated financial statements, areas that are particularly
significant include the assessment of the recoverability of long-lived assets,
specifically goodwill and acquired intangibles, the establishment of an
allowance for doubtful accounts and the valuation allowance for deferred income
tax assets.
In certain instances, accounting principles generally accepted in the
United States of America allow for the selection of alternative accounting
methods. Two alternative methods for accounting for stock options are available,
the intrinsic value method and the fair value method. We use the intrinsic value
method of accounting for stock options, and accordingly, no compensation expense
has been recognized for options issued at an exercise price equal to or greater
than the quoted market price on the date of grant to employees, officers and
directors. Under the fair value method, the determination of the pro forma
amounts involves several assumptions including option life and volatility. If
the fair value method were used, basic earnings per share and diluted earnings
per share would have decreased by $0.09 and $0.06, respectively, in 2002.
As discussed in Note 5 to the consolidated financial statements, the
goodwill arising from our acquisitions is not amortized, but instead is tested
for impairment at least annually in accordance with the provisions of SFAS No.
142, Goodwill and Other Intangible Assets. The impairment test requires several
estimates including future cash flows, growth rates and the selection of a
discount rate. In addition, the acquired intangibles arising from those
transactions are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. The recoverability of assets to be held and used is measured by
comparing the carrying amount of the asset to the future net undiscounted cash
flows expected to be generated by the asset. We cannot guarantee that our assets
will not be impaired in future periods.
We maintain reserves for specific and general allowances against accounts
receivable. The specific reserves are established on a case-by-case basis by
management. A general reserve is established for all other accounts receivable,
based on a specified percentage of the accounts receivable balance. We
continually assess the adequacy of the recorded allowance for doubtful accounts,
based on our knowledge concerning the customer base. While credit losses have
historically been within our expectations and the provisions established, we
cannot guarantee that we will continue to experience the same credit loss rates
that we have in the past.
4
Our discontinued operations, which focused on the development of
early-stage technology businesses, generated significant net operating loss
carryforwards (NOLs) which could have value in the future. After giving effect
for certain annual limitations based on changes in ownership as defined in
Section 382 of the Internal Revenue Code, we estimate that as much as $21.7
million in NOLs may be available to offset current and future federal taxable
income. Under SFAS No. 109, Accounting for Income Taxes, we are required to
provide a valuation allowance to offset any net deferred tax assets if, based
upon available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized. Given our historical losses and our
limited track record of profitability to date, we maintained a full valuation
allowance against our deferred tax assets as of December 31, 2002 which is
consistent with what was done in the prior year. If we continue to operate
profitably in 2003, we believe that we may be able to demonstrate that it is
more likely than not that we will be able to use some or all of the NOLs in the
future. When, and if, we can cross the threshold of "more likely than not", we
would reduce our valuation allowance against all or a portion of the deferred
tax asset.
Discontinued Operations
Prior to the first quarter of 2001, our principal business was developing
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. 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.
To reflect the change in business model, our financial statements have
been presented in a manner in which the assets, liabilities, results of
operations and cash flows related to our former business have been segregated
from that of our continuing operations and are presented as discontinued
operations.
Results of Operations
Basis of Presentation
Our results of operations are presented in a manner that is intended to
provide meaningful data with respect to our transition to and ongoing operations
as a third-party logistics company. Since Global and United American were
acquired in 2002, our historical results from continuing operations for 2001
reflect only the operations of Air Plus for the three months ended December 31,
2001. Accordingly, in addition to providing comparative analysis on a historical
basis, we have also provided supplemental unaudited pro forma information that
we believe is useful to an understanding of how our results of operations have
performed on a year on year basis.
Year ended December 31, 2002 (historical) compared to year ended
December 31, 2001 (historical)
The following table summarizes our historical total revenues, net
transportation revenues and other revenues (in thousands):
Change
--------------------------
2002
Restated 2001 Amount Percent
-------- -------- --------
Total revenues $122,788 $ 15,598 $107,190 687.2%
======== ======== ========
Transportation revenues 113,510 15,174 98,336 648.1
Cost of transportation 84,478 9,741 74,737 767.2
-------- -------- --------
Net transportation revenues 29,032 5,433 23,599 434.5
Net transportation margins 25.6% 35.8%
Customs brokerage 6,290 -- 6,290 NM
Warehousing and other
value added services 2,988 424 2,564 604.7
-------- -------- --------
Total net revenues $ 38,310 $ 5,857 $ 32,453 554.1
======== ======== ========
Total revenues were $122.8 million for the year ended December 31, 2002,
an increase of $107.2 million or 687.2% over total revenues of $15.6 million for
the comparable period in 2001. $56.7 million or 52.9% of the increase in total
revenues was attributable to the operations of the businesses we acquired in
2002; $5.3 million or 4.9% was due to an increase in Air Plus' revenues for the
fourth quarter of 2002 over the comparable period in 2001 ("organic growth");
and the remaining $45.2 million or 42.2% of the increase was attributable to an
incremental three quarters of Air Plus' operations in 2002 over 2001.
5
Net transportation revenues were $29.0 million for the year ended December
31, 2002, an increase of $23.6 million or 434.5% over net transportation
revenues of $5.4 million for the comparable period in 2001. $8.5 million or
36.0% of the increase in net transportation revenues was attributable to
acquisitions; $1.0 million or 4.2% was due to organic growth; and the remaining
$14.1 million or 59.8% of the increase was attributable to an incremental three
quarters of Air Plus' operations in 2002 over 2001.
Net revenues were $38.3 million for the year ended December 31, 2002, an
increase of $32.5 million or 554.1% over net revenues of $5.9 million for the
comparable period in 2001. $15.5 million or 47.8% of the increase in net
revenues was attributable to the operations of the businesses we acquired in
2002; $1.0 million or 3.1% was due to organic growth; and the remaining $15.9
million or 49.1% of the increase was attributable to an incremental three
quarters of Air Plus' operations in 2002 over 2001.
Net transportation margins decreased to 25.6% for the year ended December
31, 2002 from 35.8% for the comparable period in 2001. This decrease in net
transportation margins is primarily the result of the addition of our
International Services platform, which traditionally has lower margins, in the
second quarter of 2002.
The following table summarizes certain historical consolidated statement
of operations data as a percentage of our net revenues (in thousands):
2002 2001 Change
---------------------- ------------------------ ----------------------
Amount Percent Amount Percent Amount Percent
--------- ------- -------- ------- --------- -------
Net revenues $ 38,310 100.0% $ 5,857 100.0% $ 32,453 554.1%
--------- ------ -------- ------ ---------
Personnel costs 19,089 49.8 5,997 102.4 13,092 218.3
Other selling, general and administrative costs 14,680 38.3 3,917 66.9 10,763 274.8
Depreciation and amortization 2,187 5.7 495 8.4 1,692 341.8
--------- ------ -------- ------ ---------
Total operating costs 35,956 93.8 10,409 177.7 25,547 245.4
--------- ------ -------- ------ ---------
Income (loss) from operations 2,354 6.2 (4,552) (77.7) 6,906 NM
Other income (expense) 128 0.3 1,295 22.1 (1,167) (90.1)
--------- ------ -------- ------ ---------
Income (loss) from operations before
income taxes 2,482 6.5 (3,257) (55.6) 5,739 NM
Income taxes 102 0.3 -- -- 102 NM
--------- ------ -------- ------ ---------
Income (loss) from continuing 2,380 6.2 (3,257) (55.6) 5,637 NM
operations
Loss from discontinued operations -- -- (13,863) (236.7) 13,863 NM
--------- ------ -------- ------ ---------
Net income (loss) 2,380 6.2 (17,120) (292.3) 19,500 NM
Preferred stock dividends 15,020 39.2 (4,151) (70.9) 19,171 NM
--------- ------ -------- ------ ---------
Net income (loss) attributable to common
stockholders $ 17,400 45.4% $(21,271) (363.2)% $ 38,671 NM
========= ====== ======== ====== =========
Personnel costs were $19.1 million for the year ended December 31, 2002,
an increase of $13.1 million or 218.3% over personnel costs of $6.0 million for
the comparable period in 2001. $5.7 million or 43.5% of the increase in
personnel costs was attributable to the operations of the businesses we acquired
in 2002; $0.7 million or 5.4% was due to organic growth; and the remaining $6.7
million or 51.1% of the increase was attributable to an incremental three
quarters of Air Plus' operations in 2002 over 2001.
The number of employees increased to 510 at December 31, 2002 from 219 at
December 31, 2001, an increase of 291 employees or 132.9%. Of this increase, 240
or 82.5% of the employees are engaged in operations; 16 or 5.5% of the employees
are engaged in sales and marketing; and 35 or 12.0% of the employees are engaged
in finance, administration, and management functions. Additionally, 204 or 69.9%
of the total increase in employees was attributable to acquisitions, while 88
employees or 30.1% were added to meet the demands of the increase in our
business in 2002.
Other selling, general and administrative costs were $14.7 million for the
year ended December 31, 2002, an increase of $10.8 million or 274.8% over other
selling, general and administrative costs of $3.9 million for the comparable
period in 2001. $3.0 million or 27.8% of the increase was attributable to the
operations of the businesses we acquired in 2002; $0.8 million or 7.4% was due
to organic growth; and the remaining $7.0 million or 64.8% of the increase was
attributable to an incremental three quarters of Air Plus' operations in 2002
over 2001.
6
Depreciation and amortization amounted to $2.2 million for the year ended
December 31, 2002, an increase of $1.7 million or 341.8% over the comparable
period in 2001 principally due to amortization of acquired intangible assets
acquired in the Global and United American acquisitions and a full year of
amortization of the Air Plus intangible assets acquired in October 2001. (See
Note 2 to the Company's consolidated financial statements.)
Income from operations was $2.4 million in 2002, compared to a loss of
$4.6 million for 2001.
Other income was $0.1 million in 2002, a decrease from $1.3 million in
2001.
As a result of historical losses related to investments in early-stage
technology business, the Company has accumulated federal net operating loss
carryforwards. Although a portion of this loss may be subject to certain
limitations, the Company expects it will be able to use approximately $21.7
million of the loss to offset current and future federal taxable income. As a
result, the Company is currently only subject to certain state and local taxes
which resulted in a state tax provision of $0.1 million in 2002.
There were no losses from discontinued operations in 2002 as compared to
losses from discontinued operations of $13.9 million in 2001. These 2001 losses
reflect the costs associated with our holdings in early-stage technology
businesses for our previous business model, including investment losses,
personnel and office costs.
Net income was $2.4 million in 2002, compared to a net loss of $17.1
million in 2001.
The Company recorded a net non-cash benefit of $15.0 million associated
with the restructuring of our Series C Preferred stock, after giving effect to
$1.9 million in preferred stock dividends, compared to preferred stock dividends
of $4.2 million in 2001. See Note 12 to the consolidated financial statements.
Net income attributable to common stockholders was $17.4 million in 2002,
compared to a net loss attributable to common stockholders of $21.3 million in
2001. Basic earnings per share was $0.79 for 2002 compared to a loss of $1.04
per basic share for 2001. Diluted earnings per share for 2002 excludes the net
effect of the Series C exchange transaction and was $0.08 per diluted share for
2002 compared to a loss of $1.04 per diluted share for 2001.
Year ended December 31, 2001 (historical) compared to year ended
December 31, 2000 (historical)
The following table summarizes our historical total revenues, net
transportation revenues and other revenues (in thousands):
Change
--------------------------
2001 2000 Amount Percent
-------- ------ ------- ---------
Total revenues $ 15,598 $ -- $15,598 NM
======== ====== =======
Transportation revenues 15,174 -- 15,174 NM
Cost of transportation 9,741 -- 9,741 NM
-------- ------ -------
Net transportation revenues 5,433 -- 5,433 NM
Net transportation margins 35.8% -- -- --
Customs brokerage -- -- -- NM
Warehousing and other
value added services 424 -- 424 NM
-------- ------ -------
Total net revenues $ 5,857 $ -- $ 5,857 NM
======== ====== =======
Total revenues were $15.6 million for the year ended December 31, 2001
resulting from our transition to a third-party logistics business and represent
the revenues from Air Plus for the period from October 5, 2001 to December 31,
2001. There were no revenues for the comparable period in 2000 under the
Company's previous business model.
Net transportation revenues were $5.4 million for the year ended December
31, 2001, while there were no net transportation revenues for the comparable
period in 2000.
Net revenues were $5.9 million for the year ended December 31, 2001, while
there were no net revenues for the comparable period in 2000.
7
Net transportation margins were 35.8% for the year ended December 31,
2001, while there were no margins for the comparable period in 2000 due to a
lack of both transportation revenues and any related costs.
The following table summarizes certain historical consolidated statement
of operations data as a percentage of our net revenues (in thousands):
2001 2000 Change
---------------------- ------------------------ ----------------------
Amount Percent Amount Percent Amount Percent
--------- ------- -------- ------- --------- -------
Net revenues $ 5,857 100.0% $ -- -- $ 5,857 NM
--------- ------ -------- ------ ---------
Personnel costs 5,997 102.4 4,263 -- 1,734 40.7%
Other selling, general and administrative costs 3,917 66.9 3,126 -- 791 25.3
Depreciation and amortization 495 8.4 31 464 1,496.8
--------- ------ -------- ------ ---------
Total operating costs 10,409 177.7 7,420 -- 2,989 40.3
--------- ------ -------- ------ ---------
Loss from operations (4,552) (77.7) (7,420) -- 2,868 38.7
Other income 1,295 22.1 2,065 -- (770) (37.3)
--------- ------ -------- ------ ---------
Loss from continuing operations before
income taxes (3,257) (55.6) (5,355) -- 2,098 39.2
Income taxes
-- -- -- -- -- --
Loss from continuing operations (3,257) (55.6) (5,355) -- 2,098 39.2
Loss from discontinued operations (13,863) (236.7) (30,816) -- 16,953 55.0
--------- ------ -------- ------ ---------
Net loss (17,120) (292.3) (36,171) -- 19,051 52.7
Preferred stock dividends (4,151) (70.9) (45,751) -- 41,600 90.9
--------- ------ -------- ------ ---------
Net loss attributable to common
stockholders $ (21,271) (363.2)% $(81,922) -- $ 60,651 74.0
========= ====== ======== ====== =========
Personnel costs were $6.0 million for the year ended December 31, 2001, an
increase of $1.7 million or 40.7% over personnel costs of $4.3 million for the
comparable period in 2000. The increase, primarily attributable to the
acquisition of Air Plus in the fourth quarter of 2001, was offset by a reduction
of approximately $1.0 million in stock-based compensation.
The number of employees increased to 219 at December 31, 2001 from 10 at
December 31, 2000, an increase of 209 employees. Of this increase, 169 or 80.9%
of the employees are engaged in operations; 14 or 6.7% of the employees are
engaged in sales and marketing; and 26 or 12.4% of the employees are engaged in
finance, administration, and management functions.
Other selling, general and administrative costs were $3.9 million for the
year ended December 31, 2001, an increase of $0.8 million or 25.3% over other
selling, general and administrative costs of $3.1 million for the comparable
period in 2000. The increase was primarily attributable to the acquisition of
Air Plus in the fourth quarter of 2001.
Depreciation and amortization amounted to $0.5 million for the year ended
December 31, 2001, an increase of $0.5 million or 1,496.8% compared to the prior
year, principally due to the increase in furniture and equipment and amortizable
intangible assets acquired in the Air Plus transaction.
Loss from operations was $4.6 million in 2001, compared to a loss of $7.4
million in 2000.
Other income was $1.3 million in 2001, a decrease from $2.1 million in
2000, principally as a result of lower interest income, because previously
invested funds were used to purchase Air Plus and to fund losses from
operations.
There was a loss from discontinued operations in 2001 of $13.9 million, as
compared to a loss from discontinued operations of $30.8 million in 2000. These
losses reflect the costs associated with our holdings in early-stage technology
businesses under our previous business model, including investment losses,
personnel and office costs.
Net loss was $17.1 million in 2001, compared to a net loss of $36.2
million in 2000.
8
Preferred stock dividends were $4.2 million in 2001, compared to preferred
stock dividends of $45.8 million in 2000. The dividend in 2000 included $42.6
million related to a beneficial conversion feature for the Series C Preferred
Stock. See Note 12 to the consolidated financial statements.
Net loss attributable to common stockholders was $21.3 million in 2001,
compared to a net loss attributable to common stockholders of $81.9 million in
2000. Basic and diluted loss per share was $1.04 for 2001 compared to a loss of
$4.64 per basic and diluted share for 2000.
Supplemental Unaudited Pro Forma Information
The unaudited pro forma results of operations for 2002 and 2001 are
presented as if we had discontinued our former business model and acquired Air
Plus, Global and United American (collectively the "Material Acquisitions") as
of January 1, 2001. The unaudited pro forma results reflect a consolidation of
the historical results of operations of the Material Acquisitions, as adjusted
to reflect contractual adjustments to officers' compensation at the companies
comprising the Material Acquisitions, amortization of acquired intangibles and
income taxes. The unaudited pro forma results also exclude losses associated
with our discontinued operations as well as the impact of the July 18, 2002
exchange transaction with the holders of our Series C Preferred Stock.
Year ended December 31, 2002 (unaudited pro forma) compared to year ended
December 31, 2001 (unaudited pro forma)
The following table summarizes our total revenues, net transportation
revenues and other revenues on a pro forma basis (in thousands):
Change
--------------------------
2002 2001
Restated Restated Amount Percent
-------- -------- ------- ---------
Total revenues $145,902 $119,857 $26,045 21.7%
======== ======== =======
Transportation revenues 134,310 111,589 22,721 20.4
Cost of transportation 100,748 82,455 18,293 22.2
-------- -------- -------
Net transportation revenues 33,562 29,134 4,428 15.2
Net transportation margins 25.0% 26.1% -- --
Customs brokerage 8,333 6,799 1,534 22.6
Warehousing and other
value added services 3,259 1,469 1,790 121.9
-------- -------- -------
Total net revenues $ 45,154 $ 37,402 $ 7,752 20.7
======== ======== =======
Despite 2002's sluggish economy, pro forma total revenues were $145.9
million in 2002, an increase of 21.7% over pro forma total revenues of $119.9
million in 2001.
Pro forma transportation revenues were $134.3 million for the year ended
December 31, 2002, an increase of 20.4% over pro forma transportation revenues
of $111.6 million for the comparable period in 2001. The increase is due to the
opening of three Domestic terminals and four International terminals during
2002, the contribution for the full year from six Domestic terminals opened in
2001, as well as organic growth. $88.7 million or 66.0% of the 2002 pro forma
transportation revenues was attributable to our Domestic operations, while $45.6
million or 34.0% was attributable to our International operations. $76.3 million
or 68.4% of the 2001 pro forma transportation revenues was attributable to our
Domestic operations, while $35.3 million or 31.6% was attributable to our
International operations.
Pro forma net transportation revenues were $33.6 million for the year
ended December 31, 2002, an increase of $4.4 million or 15.2% over pro forma net
transportation revenues of $29.1 million for the comparable period in 2001.
Pro forma net revenues were $45.2 million in 2002, an increase of 20.7%
over pro forma net revenues of $37.4 million in 2001.
Pro forma net transportation margins decreased to 25.0% for the year ended
December 31, 2002 from 26.1% for the comparable period in 2001. This decrease in
pro forma net transportation margins is primarily the result of a larger
proportionate increase in our international services, which traditionally have
lower margins, in 2002. For 2002, pro forma net transportation margins were
30.5% and 14.4% for our Domestic and International operations, respectively. For
2001, pro forma net transportation margins were 32.0% and 13.6% for our Domestic
and International operations, respectively.
9
The following table summarizes certain statement of operations data as a
percentage of our net revenues on a pro forma basis (in thousands):
Restated Restated
2002 2001 Change
---------------------- ------------------------ ----------------------
Amount Percent Amount Percent Amount Percent
--------- ------- -------- ------- --------- -------
Net revenues $ 45,154 100.0% $ 37,402 100.0% $ 7,752 20.7%
--------- ------ -------- ------ ---------
Personnel costs 22,214 49.2 17,377 46.5 4,837 27.8
Other selling, general and administrative 18,398 40.7 18,180 48.6 218 1.2
--------- ------ -------- ------ ---------
Total operating costs 40,612 89.9 35,557 95.1 5,055 14.2
--------- ------ -------- ------ ---------
Income from operations 4,542 10.1 1,845 4.9 2,697 146.2
Other income (expense) 14 -- (13) -- 27 NM
--------- ------ -------- ------ ---------
Income from continuing operations before
income taxes 4,556 10.1 1,832 4.9 2,724 148.7
Income taxes 187 0.4 50 0.1 137 274.0
--------- ------ -------- ------ ---------
Income from continuing operations $ 4,369 9.7% $ 1,782 4.8% $ 2,587 145.2%
========= ====== ======== ====== =========
Personnel costs were $22.2 million for 2002, an increase of 27.8% over
$17.4 million for 2001. Personnel costs as a percentage of net revenues
increased to 49.2% from 46.5% in 2001. This increase is primarily attributable
to the Company's efforts to position itself for continued growth through
additional resources deployed in sales, technology and back-office operations.
The number of employees increased to 510 at December 31, 2002 from 409 at
December 31, 2001, an increase of 101 employees or 24.7%. Of this increase, 90
or 89.1% of the employees are engaged in operations; 2 or 2.0% are engaged in
sales and marketing; and 9 or 8.9% of the employees are engaged in finance,
administration, and management functions.
Other selling, general and administrative expenses were $18.4 million for
2002, relatively flat compared to $18.2 million in 2001. As a percentage of net
revenues, other selling, general and administrative expenses decreased to 40.7%
from 48.6% in 2001 and is indicative of the scalability of our business model.
Income from operations was $4.5 million in 2002, an increase of 146.2%
over $1.8 million for 2001. Income from operations as a percentage of net
revenues increased to 10.1% from 4.9% in 2001.
As a result of historical losses related to investments in early-stage
technology businesses, the Company has accumulated net operating loss
carryforwards for federal and state income tax purposes amounting to
approximately $21.7 million and $16.2 million, respectively. Although a portion
of this loss may be subject to certain limitations, it appears that we may be
able to use approximately $21.7 million of the federal operating loss
carryforward to offset current and future federal taxable income. As a result,
the Company is currently only subject to certain state and local taxes which on
a pro forma basis results in a tax provision of $0.2 million for 2002 and $0.1
million for 2001.
Net income was $4.4 million in 2002, an increase of 146.7% compared to
$1.8 million in 2001. Pro forma net income per share in 2002 was $0.20 per basic
share (excludes the impact of the July 18, 2002 exchange transaction with the
holders of the Series C Preferred Stock) and $0.15 per diluted share.
In accordance with SEC Regulation S-K, we present the following tables,
which reconcile our actual results of operations to our pro forma results of
operations for the years ended December 31, 2002 and 2001 (in thousands).
10
Year ended December 31, 2002
-----------------------------------------------------------------------------------------------
Restated
Restated Global United American
historical January 1- April 4, January 1- May 30, Pro forma Restated
Stonepath Group 2002 2002 adjustments pro forma
--------------- ------------------- ------------------ ----------- ----------
Total revenues $ 122,788 $ 10,707 $ 12,407 $ -- $ 145,902
Cost of transportation 84,478 7,049 9,221 100,748
---------- --------- --------- -------- ---------
--
Net revenues 38,310 3,658 3,186 -- 45,154
Personnel costs 19,089 1,642 1,407 76(1) 22,214
Other selling, general and
administrative costs 16,867 763 880 (112)(2) 18,398
---------- --------- --------- -------- ---------
Income from operations 2,354 1,253 899 36 4,542
Other income (expense)
Interest income 91 -- -- (73)(3) 18
Other, net 37 27 (68) -- (4)
---------- --------- --------- -------- ---------
Income before income taxes
2,482 1,280 831 (37) 4,556
Income taxes 102 36 22 (27)(4) 187
---------- --------- --------- -------- ---------
Net income $ 2,380 $ 1,244 $ 809 $ (64) $ 4,369
========== ========= ========= ======== =========
(1) To reflect contractual changes to officers' compensation.
(2) To reflect amortization of acquired identifiable intangibles under the
declining balance method using a 25% rate.
(3) To eliminate interest income as a result of a reduced cash balance due to
the payment of approximately $10.6 million for Global and United American.
(4) To reflect state taxes on pro forma income before income taxes.
Year ended December 31, 2001
-------------------------------------------------------------------------------------------------
Air Plus
Historical January 1 - Restated United Pro forma Restated
Stonepath Group October 4, 2001 Global American adjustments pro forma
--------------- --------------- -------- -------- ----------- ----------
Total revenues $ 15,598 $ 41,224 $ 41,598 $ 21,437 $ -- $ 119,857
Cost of transportation 9,741 26,527 30,548 15,639 -- 82,455
--------- --------- -------- -------- -------- ---------
Net revenues 5,857 14,697 11,050 5,798 -- 37,402
Personnel costs 5,997 5,985 6,571 2,557 (3,733)(1) 17,377
Other selling, general and
administrative costs 4,412 6,697 3,386 2,325 1,360(2) 18,180
--------- --------- -------- -------- -------- ---------
Income (loss) from operations (4,552) 2,015 1,093 916 2,373 1,845
Other income (expense)
Interest income 1,286 (43) (89) (23) (957)(3) 174
Other, net 9 (196) -- -- -- (187)
--------- --------- -------- -------- -------- ---------
Income (loss) before
income taxes (3,257) 1,776 1,004 893 1,416 1,832
Income taxes -- -- -- -- 50(4) 50
--------- --------- -------- -------- -------- ---------
Net income (loss) $ (3,257) $ 1,776 $ 1,004 $ 893 $ 1,366 $ 1,782
========= ========= ======== ======== ======== =========
11
(1) To reflect contractual changes to officers' compensation.
(2) To reflect amortization of acquired identifiable intangibles under the
declining balance method using a 25% rate.
(3) To eliminate interest income as a result of a reduced cash balance due to
the payment of approximately $28.5 million for the Material Acquisitions.
(4) To reflect state taxes on pro forma income before income taxes.
Disclosures About Contractual Obligations
The following table aggregates all contractual commitments and commercial
obligations that affect the Company's financial condition and liquidity position
as of December 31, 2002:
Payments Due By Period
---------------------------------------------------------------------------
Contractual Obligations Less than More than
1 year 1 - 3 years 3- 5 years 5 years Total
----------- ----------- ---------- --------- -----------
Operating lease obligations $3,782,000 $ 5,726,000 $2,435,000 $ 611,000 $12,554,000
Other long-term liabilities reflected on
the Registrant's balance sheet under GAAP(a) 3,880,000 -- -- -- 3,880,000
Letter of credit 160,000 -- -- -- 160,000
----------- ----------- ---------- --------- -----------
Total contractual obligations 7,822,000 5,726,000 2,435,000 611,000 16,594,000
Contingent earn-out obligations (b) -- 14,900,000 7,450,000 255,000 22,605,000
----------- ----------- ---------- --------- -----------
Total contractual and contingent obligations $ 7,822,000 $20,626,000 $9,885,000 $ 866,000 $39,199,000
=========== =========== ========== ========= ===========
(a) Consists of earn-out payments which are due in 2003 to the former owners of
our existing subsidiaries.
(b) Consists of potential obligations related to earn-out payments to the former
owners of our existing subsidiaries, as discussed under Liquidity and
Capital Resources.
Liquidity and Capital Resources
Prior to the adoption of our current business model, our operations
consisted of developing early-stage technology businesses. These operations did
not generate sufficient operating funds to meet our cash needs, and, as a
result, we funded our historic operations with the proceeds from a number of
private placements of debt and equity securities. With the advent of our new
business model, we expect to be able to fund our operations with the cash flow
generated by the subsidiaries we acquire. We are also in an acquisition mode and
expect to deploy material amounts of capital as we execute our business plan.
Therefore, it is likely that we will need to raise additional capital in the
future. There can be no assurance that we will be able to raise additional
capital on terms acceptable to us, if at all.
Cash and cash equivalents totaled $2.3 million and $15.2 million as of
December 31, 2002 and 2001. Working capital totaled $5.6 million and $15.3
million at December 31, 2002 and 2001.
Cash used in operating activities was $0.6 million for 2002 compared to
$0.5 million used in 2001. Before growth in working capital accounts driven
principally by the acquisition of new businesses, the Company generated cash
from operations in 2002 of $4.7 million compared to a net use of $1.1 million in
cash from operations in 2001.
Net cash used in investing activities was $12.5 million in 2002 compared
to $12.1 million in 2001. Investing activities were driven principally by the
acquisition of new businesses. The Company deployed $10.5 million for the
acquisition of new businesses in 2002 compared to $18.0 million in 2001. The
cash used in the acquisition of Air Plus in 2001 was partially offset by
approximately $7.0 million from the sale of our interest in Webmodal, Inc.
(including $1.0 million from the repayment of prior advances).
12
Cash from financing activities generated $0.2 million in 2002 compared to
a use of cash of $1.2 million in 2001. The 2001 use of cash was primarily
related to the repayment of short-term notes payable to the former shareholders
of Air Plus.
We expect to pay approximately $3.9 million in earn-outs on April 1, 2003,
based on the performance of our acquired companies relative to their respective
pre-tax earnings targets. Approximately $3.5 million will be paid in cash with
the balance payable through the issuance of shares of our common stock.
On July 18, 2002 we completed a private exchange transaction that
eliminated approximately $44.6 million of our Series C preferred stock. The
terms of the Series C preferred stock would have significantly constrained our
future growth opportunities. In return for eliminating the Series C preferred
stock, we issued 1,911,071 shares of common stock, warrants to purchase
1,543,413 shares of common stock at an exercise price of $1.00 per share for a
term of three (3) years, and a new class of Series D preferred stock that will
convert into 3,607,450 shares of our common stock no later than December 31,
2004. The terms of the Series D preferred stock were structured to make it much
like a common equity equivalent in that (1) it receives no dividend, (2) it is
subordinated to new rounds of equity, and (3) it holds a limited liquidation
preference (expiring at the end of 2003). In addition, the holders of the Series
D preferred stock are restricted from selling the common stock received upon
conversion of the Series D preferred stock until July 19, 2003 (or earlier if
the stock trades at $4.50) and are then permitted limited resale based on
trading volume through July 19, 2004.
In March 2003, we completed a private placement of 4,470,000 shares of our
common stock in exchange for gross proceeds of approximately $6.1 million. This
placement yielded net proceeds of $5.7 million for the Company, after the
payment of placement agent fees and other out-of-pocket costs associated with
the placement.
We may also receive proceeds in the future from the exercise of existing
options and warrants. As of March 17, 2003, approximately 13,220,000 options and
warrants were outstanding. Of the outstanding securities, there are
approximately 300,000 that have an exercise price of $5.00 per share or higher.
If we exclude those options and warrants from our fully diluted share count, our
outstanding fully diluted shares, as adjusted, would be approximately 44,500,000
shares. Excluding options and warrants with an exercise price of $5.00 or
higher, the proceeds received by the Company, if all of the remaining options
and warrants were exercised, would be approximately $15.0 million.
We believe that our current working capital and anticipated cash flow from
operations are adequate to fund existing operations. Through cash resources and
our existing credit facility, we believe we have sufficient capital to implement
our acquisition strategy in the short term. However, we will need additional
financing to pursue our acquisition strategy in the longer term. We intend to
finance these acquisitions primarily through the use of cash, funds from our
debt facility, and shares of our common stock or other securities. In the event
that our common stock does not attain or maintain a sufficient market value or
potential acquisition candidates are otherwise unwilling to accept our
securities as part of the purchase price for the sale of their businesses, we
may be required to utilize more of our cash resources, if available, in order to
continue our acquisition program. If we do not have sufficient cash resources
through either operations or from debt facilities, our growth could be limited
unless we are able to obtain such additional capital.
To ensure that we have adequate near-term liquidity, we maintain a
revolving credit facility of $15.0 million (the "Facility") with LaSalle
Business Credit, Inc. that is collateralized by accounts receivable and other
assets of the Company and its subsidiaries. The Facility requires the Company
and its subsidiaries to comply with certain financial covenants. Advances under
the Facility are available to fund future acquisitions, capital expenditures or
for other corporate purposes. There were no advances against the Facility at
December 31, 2002. We expect that the cash flow from our existing operations and
any other subsidiaries acquired during the year will be sufficient to support
our corporate overhead and some portion, if not all, of the contingent earn-out
payments or other cash requirements associated with our acquisitions. Therefore,
we anticipate that our primary uses of capital in the near term will be to
finance the cost of new acquisitions and to pay any portion of existing earn-out
arrangements that cash flow from operations is otherwise unable to fund.
The acquisition of Air Plus was completed subject to an earn-out
arrangement of $17.0 million. We agreed to pay the former Air Plus shareholders
installments of $3.0 million in 2003, $5.0 million in 2004, $5.0 million in 2005
and $4.0 million in 2006, with each installment payable in full if Air Plus
achieves pre-tax income of $6.0 million in each of the years preceding the year
of payment. In the event there is a shortfall in pre-tax income, the earn-out
payment will be reduced on a dollar-for-dollar basis to the extent of the
shortfall. Shortfalls may be carried over or carried back to the extent that
pre-tax income in any other payout year exceeds the $6.0 million level. Based
upon 2002 performance, former Air Plus shareholders are entitled to receive $3.0
million on April 1, 2003, and will have excess earnings of $0.3 million as a
carryforward to future earnings targets. Former Air Plus shareholders have
elected to take $2.6 million in cash with the balance payable in Company stock.
13
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 transaction was valued at up to $12.0 million, consisting of cash
of $5.0 million paid at the closing and up to an additional $7.0 million payable
over a five year earn-out period based upon the future financial performance of
Global. We agreed to pay the former Global shareholders a total of $5.0 million
base earn-out payments in installments of $0.8 million in 2003, $1.0 million in
2004 through 2007 and $0.2 million in 2008, with each installment payable in
full if Global achieves pre-tax income of $2.0 million in each of the years
preceding the year of payment (or the pro rata portion thereof in 2002 and
2007). In the event there is a shortfall in pre-tax income, the earn-out payment
will be reduced on a pro-rata basis. Shortfalls may be carried over or carried
back to the extent that pre-tax income in any other payout year exceeds the $2.0
million level. The Company has also provided former Global shareholders with
additional incentive to generate earnings in excess of the base $2.0 million
annual earnings target ("tier-two earn-out"). Under Global's tier-two earn-out,
former Global shareholders are also entitled to receive 40% of the cumulative
pre-tax earnings in excess of $10.0 million generated during the five year
earn-out period subject to a maximum additional earn-out opportunity of $2.0
million. Global would need to generate cumulative earnings of $15.0 million over
the five year earn-out period to receive the full $7.0 million in contingent
earn-out payments. Based upon 2002 performance, former Global shareholders will
receive $0.8 million on April 1, 2003, and will have excess earnings of $2.5
million as a carryforward to future earnings targets.
On May 30, 2002 we acquired United American, a Detroit-based privately
held provider of expedited transportation services. The United American
transaction provided us with a new time-definite service offering focused on the
automotive industry. The transaction is valued at up to $16.1 million,
consisting of cash of $5.1 million paid at closing and a four-year earn-out
arrangement based upon the future financial performance of United American. We
agreed to pay the former United American shareholder a total of $5.0 million
base earn-out payments in installments of $1.25 million in 2003 through 2006,
with each installment payable in full if United American achieves pre-tax income
of $2.2 million in each of the years preceding the year of payment. In the event
there is a shortfall in pre-tax income, the earn-out payment will be reduced on
a dollar-for-dollar basis to the extent of the shortfall. Shortfalls may be
carried over or carried back to the extent that pre-tax income in any other
payout year exceeds the $2.2 million level. The Company has also provided the
former United American shareholder with additional incentive to generate
earnings in excess of the base $2.2 million annual earnings target ("tier-two
earn-out"). Under United American's tier-two earn-out, the former United
American shareholder is also entitled to receive 50% of the cumulative pre-tax
earnings generated by a certain pre-acquisition customer in excess of $8.8
million during the four year earn-out period subject to a maximum additional
earn-out opportunity of $6.0 million. United American would need to generate
cumulative earnings of $20.8 million over the four year earn-out period to
receive the full $11.0 million in contingent earn-out payments. Based upon 2002
performance, the former United American shareholder will receive $0.2 million on
April 1, 2003, and has an earnings shortfall of $1.0 million. In future years,
earnings in excess of the $2.2 million earnings target would first be applied
against the $1.0 million shortfall.
On October 1, 2002 we acquired TSI, a Northern Virginia-based privately
held provider of expedited domestic and international transportation services.
The TSI transaction capitalized on TSI's existing base of government contract
work in the Washington metropolitan area and served as a supplement to an
existing Company-operated facility in that area. The transaction was valued at
up to $1.1 million, consisting of cash of $0.5 million paid at closing, and a
three-year earn-out arrangement. The Company agreed to pay the former TSI
shareholder $0.2 million for each year in the three year earn-out period ending
December 31, 2005, based upon the annual net revenue targets of $1.6 million. In
the event there is a shortfall in net revenues, the earn-out payment will be
reduced proportionally to the extent of the shortfall, provided no earn-out
payment shall be made if net revenues for the year fall below $1.0 million.
Shortfalls may be carried over or carried back to the extent that net revenues
in any other payout year exceeds the $1.6 million level.
We are also in the process of closing a transaction that will
significantly increase our presence in Asia. On March 12, 2003, we announced our
agreement to acquire a 70.0% interest in Singapore-based G-Link Group
("G-Link"), a platform acquisition that will provide the foundation for our
service offering in Southeast Asia. As currently structured, we are expected to
pay at closing approximately $2.4 million in cash and $1.2 million of our common
stock to the G-Link shareholders. We would also expect to pay the G-Link
shareholders for working capital balances. The amount, estimated to be in the
range of $1.0 to $2.0 million, would be paid using Company common stock. The
G-Link shareholders would be entitled to a four year earn-out arrangement based
upon the future financial performance of G-Link. The earn-out is expected to be
$2.4 million, payable in installments of $0.6 million per year. The transaction
is expected to close by no later than June 30, 2003, and is subject to customary
closing conditions, including the securing of third-party and regulatory
consents, as well as the completion of an audit of G-Link for the year ended
December 31, 2002.
We will be required to make significant payments in the future if the
earn-out installments under our various acquisitions become due. While we
believe that a significant portion of the required payments will be generated by
the acquired subsidiaries, we may have to secure additional sources of capital
to fund some portion of the earn-out payments as they become due. This presents
us with certain business risks relative to the availability and pricing of
future fund raising, as well as the potential dilution to our stockholders if
the fund raising involves the sale of equity.
14
The following table summarizes our contingent base earn-out payments
(in thousands)(1)(2)
2004 2005 2006 2007 2008 Total
--------- --------- --------- --------- ------- ----------
Earn-out payments:
Domestic $ 6,450 $ 6,450 $ 5,450 $ -- $ -- $ 18,350
International 1,000 1,000 1,000 1,000 255 4,255
--------- --------- --------- --------- ------- ----------
Total earn-out payments $ 7,450 $ 7,450 $ 6,450 $ 1,000 $ 255 $ 22,605
========= ========== ========= ========= ======= ==========
Prior year pre-tax earnings targets.(3)
Domestic $ 8,686 $ 8,686 $ 8,686 $ -- $ - - $ 26,058
International 2,000 2,000 2,000 2,000 510 8,510
--------- --------- --------- --------- ------- ----------
Total pre-tax earnings targets $ 10,686 $ 10,686 $ 10,686 $ 2,000 $ 510 $ 34,568
========= ========== ========= ========= ======= ==========
Earn-outs as a percentage of prior year pre-tax earnings targets:
Domestic 74.3% 74.3% 62.7% -- -- 70.4%
International 50.0% 50.0% 50.0% 50.0% 50.0% 50.0%
Combined 69.7% 69.7% 60.4% 50.0% 50.0% 65.4%
----------------
(1) Excludes the impact of prior year's pre-tax earnings carryforwards (excess
or shortfalls versus earnings targets).
(2) During the 2003-2007 earn-out period, there is an additional contingent
obligation related to tier-two earn-outs that could be as much as $8.0
million if the applicable acquired companies generate an incremental $17.0
million in pre-tax earnings.
(3) Aggregate pre-tax earnings targets as presented here identify the uniquely
defined earnings targets of each acquisition and should not be interpreted
to be the consolidated pre-tax earnings of the Company which would give
effect for, among other things, amortization or impairment of intangible
created in connection with each acquisition or various other expenses which
may not be charged to the operating groups for purposes of calculating
earn-outs.
The Company is a defendant in a number of legal proceedings. Although we
believe that the claims asserted in these proceedings are without merit, and we
intend to vigorously defend these matters, there is the possibility that the
Company could incur material expenses in the defense and resolution of these
matters. Furthermore, since the Company has not established any reserves in
connection with such claims, any such liability, if at all, 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.
New Accounting Pronouncements
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which establishes criteria and methodologies for the
measurement, recognition and classification of long-lived assets. The adoption
of SFAS No. 144 did not have a material impact on the Company's consolidated
financial statements.
In June 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities,
requiring companies to recognize liabilities and costs associated with exit or
disposal activities initiated after December 31, 2002 when they are incurred,
rather than when management commits to an exit or disposal plan. SFAS No. 146
also requires that such liabilities be measured at fair value. SFAS No. 146 had
no impact on the Company's consolidated financial statements but may affect the
measurement and recognition of any future restructuring activities.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure of Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, which elaborates on the existing
disclosure requirements for guarantees and provides clarification on when a
company must measure and recognize a liability related to guarantees issued. The
disclosure requirements of Interpretation No. 45 are effective for the Company's
consolidated financial statements for the year ended December 31, 2002. The
measurement and recognition provisions are to be applied on a prospective basis
for guarantees issued or modified after December 31, 2002. The adoption of
Interpretation No. 45 did not require additional disclosures and is not expected
to impact the Company's consolidated financial statements as the Company does
not typically issue guarantees related to third-party indebtedness or
performance.
15
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, which (i) amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for an entity that voluntarily changes the fair value based method of
accounting for stock-based employee compensation, (ii) amends the disclosure
provisions of SFAS No. 123 to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions with respect to
stock-based employee compensation and (iii) amends Accounting Principles Board
Opinion No. 28, Interim Financial Reporting, to require disclosure about those
effects in interim financial information. Items (ii) and (iii) in the new
requirements of SFAS No. 148 are effective for financial statements for fiscal
years ending after December 15, 2002. The Company has included the requirements
of item (ii) in Note 3 - Summary of Significant Accounting Policies and will
include the requirements of item (iii) beginning with its first interim report
as of and for the period ending March 31, 2003.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, which provides new guidance with respect to the
consolidation of all unconsolidated entities, including special purpose
entities. The adoption of Interpretation No. 46 in 2003 is not expected to
impact the Company's consolidated financial statements as the Company does not
have investments in any unconsolidated special purpose or variable interest
entities.
Item 7A. 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 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 levels at December 31, 2002, the fair value of our
portfolio would decline by an immaterial amount. We do not invest in derivative
financial instruments.
Item 8. Financial Statements and Supplementary Data
Our financial statements as of December 31, 2002 and 2001 and for each of
the years in the three-year period ended December 31, 2002 and footnotes related
thereto, revised to reflect the restatement thereof as more fully discussed in
Note 2 to the consolidated financial statements, are included within Item 15(a)
of this Report and may be found at pages 22 through 49. Predecessor combined
financial statements for Air Plus for the year ended December 31, 2000 and
footnotes related thereto are also included within Item 15(a) of this Report and
may be found at pages 50 through 56. Schedule II - Valuation and Qualifying
Accounts, may be found on page 57.
PART III
Item 14. Controls and Procedures
Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934,
as of the end of the period covered by this report, the Company carried out an
evaluation of the effectiveness of the Company's disclosure controls and
procedures. This evaluation was carried out under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer. Based upon that evaluation, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective. Other than as
discussed in the third paragraph of this Item 14, there have been no significant
changes in the Company's internal controls or in other factors, which could
significantly affect internal controls subsequent to the date the Company
carried out its evaluation.
Disclosure controls and procedures are designed to ensure that
information required to be disclosed in Company reports filed or submitted under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in
Company reports filed under the Exchange Act is accumulated and communicated to
management, including the Company's Chief Executive Officer and Chief Financial
Officer as appropriate, to allow timely decisions regarding required disclosure.
16
At the end of December 2003, it was determined that the Company's
consolidated statements of operations for the last three quarters of fiscal
2002, the first three quarters of fiscal 2003, and for the year ended December
31, 2002 would need to be restated, as a result of an error discovered in the
legacy accounting processes of Stonepath Logistics International Services, Inc.
(f/k/a "Global Transportation Systems, Inc.") and Global Container Line, Inc,
its wholly owned subsidiary. The Company determined that a process error existed
which resulted in the failure to eliminate certain intercompany transactions in
consolidation. This process error had been embedded within the legacy accounting
processes of Global Transportation Systems, Inc. for a period which began
substantially before its acquisition by the Company in April 2002.
The Company believes that the presence of this error, in and of itself,
constitutes a reportable condition as defined under standards established by the
American Institute of Certified Public Accountants. A reportable condition is a
significant deficiency in the design or operation of internal controls, which
could adversely affect an organization's ability to initiate, record, process
and report financial data consistent with the assertions of management in the
financial statements. To specifically respond to this matter, and in general to
meet our obligations under Section 404 of the Sarbanes-Oxley Act of 2002, the
Company has commenced an overall review of its internal controls over financial
reporting. As part of the assessment of its internal controls over financial
reporting, the Company will focus on its recent growth in terms of both size and
complexity, coupled with the fact that its finance and accounting functions are
largely decentralized. Although this review is not yet completed, the Company
has initiated an immediate change in process to correct the error that occurred
and to reduce the likelihood that a similar error could occur in the future.
As of the date of this Report, the Company believes it has a plan
that, when completed, will eliminate the reportable condition described above.
There were no other changes during the fourth quarter ended December 31, 2003
that have materially affected, or are reasonably likely to materially affect,
the Company's disclosure controls and procedures.
17
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this Report:
1. Consolidated Financial Statements:
Independent Auditors' Report............................................................ 22
Consolidated Balance Sheets as of December 31, 2002 and 2001................................ 23
Consolidated Statements of Operations for the Years Ended
December 31, 2002 (As restated), 2001 and 2000.......................................... 24
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
for the Years Ended December 31, 2002, 2001 and 2000.................................... 25
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000........................................................ 27
Notes to Consolidated Financial Statements.................................................. 28
2. Predecessor Combined Financial Statements:
Independent Auditors' Report............................................................ 50
Combined Statements of Operations for the Year Ended
December 31, 2000, and the Six Months Ended June 30, 2001 and 2000 (Unaudited).......... 51
Combined Statements of Changes in Shareholders' Equity and Comprehensive Income
for the Year Ended December 31, 2000 and the Six Months Ended June 30, 2001
(Unaudited)............................................................................. 52
Combined Statements of Cash Flows for the Year Ended
December 31, 2000 and the Six Months Ended June 30, 2001 and 2000 (Unaudited)........... 53
Notes to Combined Financial Statements...................................................... 54
3. Consolidated Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts............................................. 57
(b) Reports on Form 8-K:
We filed one report on Form 8-K during the fiscal quarter ended December
31, 2002:
(i) Form 8-K dated October 16, 2002 providing information pursuant
to Regulation FD relative to a series of meetings the Company
intended to hold with private investors.
(c) Exhibit Listing:
Exhibit
Number Document
------ --------
2.1(1) Stock Purchase Agreement by and among Stonepath Logistics, Inc.,
Stonepath Group, Inc. and M.G.R., Inc, Distribution Services, Inc.,
Contract Air, Inc., the Shareholders of M.G.R., Inc., Distribution
Services, Inc., Contract Air, Inc. and Gary A. Koch (as Shareholders'
Agent)
2.2(1) First Amendment to Stock Purchase Agreement by and among Stonepath
Logistics, Inc., Stonepath Group, Inc. and M.G.R., Inc, Distribution
Services, Inc., Contract Air, Inc., the Shareholders of M.G.R., Inc.,
Distribution Services, Inc., Contract Air, Inc. and Gary A. Koch (as
Shareholders' Agent)
2.3(2) Stock Purchase Agreement dated March 5, 2002 by and among Stonepath
Group, Inc., Stonepath Logistics International Services, Inc. and
Global Transportation Services, Inc. and the Shareholders of Global
Transportation Services, Inc. and Jason F. Totah (as shareholders'
agent)
18
Exhibit
Number Document
------ --------
2.4(3) Stock Purchase Agreement dated April 9, 2002 by and among Stonepath
Logistics Domestic Services, Inc. and United American Acquisitions
and Management, Inc., d/b/a United American Freight Services, Inc.
and Douglas Burke
2.5(3) Amendment to Stock Purchase Agreement dated May 30, 2002 by and among
Stonepath Logistics Domestic Services, Inc., and United American
Acquisitions and Management, Inc., d/b/a United Freight Services,
Inc. and Douglas Burke
3.1(4) Amended and Restated Certificate of Incorporation
3.2(5) Certificate of Amendment to the Certificate of Incorporation
3.3(5) Amended and Restated Bylaws
3.4(6) Certificate of Designation of Series D Convertible Preferred Stock
4.1(4) Specimen Common Stock Certificate for Stonepath Group, Inc.
4.2(7) Form of Common Stock Purchase Warrant issued in connection with the
Series C Convertible Preferred Stock
4.3(8) Form of Amendment to Common Stock Purchase Warrant issued upon
conversion of the Series C Convertible Preferred Stock effective as
of July 19, 2002
4.4(8) Form of Contingent Warrant issued upon conversion of the Series C
Convertible Preferred Stock effective as of July 19, 2002
4.5(6) Form of Exchange Agreement by and between the Company and certain
holders of the Company's Series C Convertible Preferred Stock
4.6(9) Stonepath Group, Inc. Amended and Restated 2000 Stock Incentive Plan
(the "Plan")
4.7(9) Form of Stock Option Agreement under the Plan
4.8(9) Form of Non-Plan Option to Purchase Common Stock of the Company
4.9(10) Amended and Restated Option Agreement between the Company and Dennis
L. Pelino effective as of February 22, 2002 ("Pelino Options")
4.10(11) Amendment No. 1 to Amended and Restated Option to Purchase Common
Stock of Stonepath Group, Inc. granted to Dennis L. Pelino, Effective
as of July 3, 2002
4.11(11) Stock Option Agreement between the Company and Dennis L. Pelino dated
July 3, 2002
4.12(9) Stock Option Agreement between the Company and Stephen M. Cohen dated
April 19, 2001
4.13(14) Stock Option Agreement between the Company and Stephen M. Cohen dated
July 3, 2002.
4.14(13) Stock Option Agreement between the Company and Bohn H. Crain dated
January 10, 2002
4.15(14) Stock Option Agreement between the Company and Bohn H. Crain dated
July 3, 2002
4.16(18) Stock Option Agreement between the Company and Bohn H. Crain dated
February 24, 2003
19
Exhibit
Number Document
------ --------
4.17(18) Stock Option Agreement between the Company and Dennis L. Pelino
(covering the grant of 300,000 Options) dated March 10, 2003
4.18(18) Stock Option Agreement between the Company and Dennis L. Pelino
(covering the grant of 400,000 Options) dated March 10, 2003
4.19(18) Form of Subscription Agreement by and between the Company and certain
purchasers of common shares (including exhibit providing for
registration rights)
4.20(18) Placement Agency Agreement between the Company and Stonegate
Securities, Inc. dated October 16, 2002
4.21(9) Stock Option Agreement between the Company and Andrew P. Panzo dated
April 19, 2001
4.22(9) Stock Option Agreement between Net Value, Inc. and Andrew P. Panzo
dated December 4, 1999
4.23(12) Option to Purchase Common Stock of the Company granted to Andrew P.
Panzo effective as of June 1, 1999
10.1(10) Amended and Restated Employment Agreement between the Company and
Dennis L. Pelino dated February 22, 2002
10.2(12) Amended and Restated Employment Agreement between the Company and
Stephen M. Cohen dated April 19, 2001
10.3(10) Letter Agreement between the Company and Stephen M. Cohen dated
December 27, 2001 10.4(18) Amended and Restated Employment Agreement
between the Company and Bohn H. Crain dated February 24, 2003
10.5(15) Separation Agreement between the Company and Andrew P. Panzo dated
December 11, 2001
10.6(1) Executive Employment Agreement between M.G.R., Inc. and Gary Koch
dated as of October 5, 2001
10.7(18) Executive Employment Agreement between Global Transportation
Services, Inc. and Jason F. Totah dated April 4, 2002
10.8(16) Stonepath Group, Inc. 401(k) Profit Sharing Plan.
10.9(17) Loan and Security Agreement dated as of May 15, 2002 between LaSalle
Business Credit, Inc. and Stonepath Group, Inc., Contract Air, Inc.,
Distribution Services, Inc., Global Transportation Services, Inc.,
Global Container Line, Inc., M.G.R., Inc., d/b/a Air Plus Limited,
Net Value, Inc., Stonepath Logistics Domestic Services, Inc.,
Stonepath Logistics International Services, Inc. and Stonepath
Operations, Inc.
21.1(18) Subsidiaries of Stonepath Group, Inc.
23.1(19) Independent Auditors' Consent
23.2(19) Independent Auditors' Consent
20
Exhibit
Number Document
------ --------
31.1(19) Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2(19) Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1(19) Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. (This exhibit shall not be deemed
"filed" for purposes of Section 18 of the Securities Exchange Act of
1934, as amended, or otherwise subject to the liability of that
section. Further, this exhibit shall not be deemed to be incorporated
by reference into any filing under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended.)
32.2(19) Certification of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. (This exhibit shall not be deemed
"filed" for purposes of Section 18 of the Securities Exchange Act of
1934, as amended, or otherwise subject to the liability of that
section. Further, this exhibit shall not be deemed to be incorporated
by reference into any filing under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended.)
----------------
(1) Incorporated by reference to the Company's Current Report on Form 8-K
dated October 5, 2001 filed October 19, 2001
(2) Incorporated by reference to the Company's Current Report on Form 8-K
dated April 4, 2002 filed April 19, 2002
(3) Incorporated by reference to the Company's Current Report on Form 8-K
dated May 30, 2002 filed June 12, 2002
(4) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Reg. No. 333-88629) filed October 8, 1999
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 2000, filed April 2, 2001
(6) Incorporated by reference to Amendment No. 1 to the Company's Registration
Statement on Form S-3 filed July 31, 2002 (Registration No. 333-91240).
(7) Incorporated by reference to the Company's Current Report on Form 8-K
dated March 3, 2000, filed March 17, 2000
(8) Incorporated by reference to the Company's Form 10-Q for the third quarter
ended September 30, 2002, filed November 14, 2002.
(9) Incorporated by reference to the Company's Registration Statement on Form
S-8 filed December 11, 2001
(10) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 2001, filed March 29, 2002
(11) Incorporated by reference to the Company's Current Report on Form 8-K
dated July 15, 2002, filed July 16, 2002
(12) Incorporated by reference to the Company's Form 10-Q for the second
quarter ended June 30, 2001, filed August 13, 2001
(13) Incorporated by reference to the Company's Current Report on Form 8-K
dated January 15, 2002, filed January 25, 2002
(14) Incorporated by reference to the Company's Form 10-Q for the second
quarter ended June 30, 2002, filed August 14, 2002
(15) Incorporated by reference to the Company's Current Report on Form 8-K
dated December 14, 2001, filed December 27, 2001
(16) Incorporated by reference to the Company's Registration Statement on Form
S-8 filed on February 25, 2003 (Registration No. 10439).
(17) Incorporated by reference to the Company's Current Report on Form 8-K
dated May 15, 2002, filed May 20, 2002
(18) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 2002, filed March 31, 2003.
(19) Filed herewith.
21
Independent Auditors' Report
Board of Directors and Stockholders of
Stonepath Group, Inc.:
We have audited the accompanying consolidated balance sheets of Stonepath Group,
Inc. and subsidiaries (the Company) as of December 31, 2002 and 2001, and the
related consolidated statements of operations, stockholders' equity and
comprehensive income (loss) and cash flows for each of the years in the
three-year period ended December 31, 2002. In connection with our audits of the
consolidated financial statements, we also have audited the financial statement
schedule as of and for the three years ended December 31, 2002. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Stonepath Group,
Inc. and subsidiaries as of December 31, 2002 and 2001 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Company has
restated its consolidated statement of operations for the year ended December
31, 2002.
/s/ KPMG LLP
Philadelphia, Pennsylvania
February 25, 2003, except
as to Note 18, which is
as of March 10, 2003 and
Note 2, which is as of
January 7, 2004
22
STONEPATH GROUP, INC.
Consolidated Balance Sheets
December 31, 2002 and 2001
2002 2001
----------- ------------
Assets
Current assets:
Cash and cash equivalents $ 2,266,108 $ 15,227,830
Accounts receivable, less allowances for doubtful accounts
of $320,000 and $167,000 at 2002 and 2001, respectively 21,799,983 7,303,426
Loans receivable from related parties 39,593 64,589
Prepaid expenses 963,102 618,873
Assets of discontinued operations 300,000 415,845
----------- ------------
Total current assets 25,368,786 23,630,563
Goodwill 20,311,150 10,822,816
Furniture and equipment, net 3,233,677 1,737,603
Acquired intangibles, net 5,042,555 4,322,333
Note receivable, related party 262,500 --
Other assets 946,847 289,574
----------- ------------
Total assets $55,165,515 $ 40,802,889
=========== ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $12,873,703 $ 5,353,656
Earn-out payable 3,879,856 --
Accrued payroll and related expenses 1,195,275 1,427,315
Accrued expenses 1,786,100 1,590,272
----------- ------------
Total current liabilities 19,734,934 8,371,243
----------- ------------
Commitments and contingencies (Notes 10 and 11)
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares authorized;
Series C, convertible, issued and outstanding: 3,750,479 shares at 2001 -- 3,750
Series D, convertible, issued and outstanding: 360,745 shares at 2002
(liquidation preference: $21,644,700) 361 --
Common stock, $.001 par value, 100,000,000 shares authorized; issued and
outstanding: 23,453,414 shares and 20,903,110 shares at 2002 and 2001, 23,453 20,903
respectively
Additional paid-in capital 196,235,064 210,730,999
Accumulated deficit (160,711,891) (178,112,368)
Deferred compensation (116,406) (211,638)
----------- ------------
Total stockholders' equity 35,430,581 32,431,646
----------- ------------
Total liabilities and stockholders' equity $55,165,515 $ 40,802,889
=========== ============
See accompanying notes to consolidated financial statements.
23
STONEPATH GROUP, INC.
Consolidated Statements of Operations
Years ended December 31, 2002, 2001 and 2000
Restated
2002 2001 2000
--------------- --------------- --------------
Total revenue $ 122,787,625 $ 15,597,889 $ --
Cost of transportation 84,477,430 9,740,774 --
--------------- --------------- --------------
Net revenue 38,310,195 5,857,115 --
Personnel costs 19,089,069 5,997,245 4,262,646
Other selling, general and administrative costs 14,679,960 3,916,601 3,125,929
Depreciation and amortization 2,186,951 495,046 31,275
--------------- --------------- --------------
Income (loss) from operations 2,354,215 (4,551,777) (7,419,850)
Other income (expense):
Interest income 90,680 1,285,657 2,080,140
Interest expense -- (4,102) (15,713)
Other income 37,311 13,153 --
--------------- --------------- --------------
Income (loss) from continuing operations before income taxes 2,482,206 (3,257,069) (5,355,423)
Income taxes 101,877 -- --
--------------- --------------- --------------
Income (loss) from continuing operations 2,380,329 (3,257,069) (5,355,423)
Discontinued operations:
Loss from discontinued operations -- (13,862,713) (30,815,850)
--------------- --------------- --------------
Net income (loss) 2,380,329 (17,119,782) (36,171,273)
Preferred stock dividends and effect of redemption 15,020,148 (4,151,198) (45,750,830)
--------------- --------------- --------------
Net income (loss) attributable to common stockholders $ 17,400,477 $ (21,270,980) $ (81,922,103)
=============== =============== ==============
Basic earnings (loss) per common share -
Continuing operations $ 0.79 $ (0.36) $ (2.89)
Discontinued operations -- (0.68) (1.75)
--------------- --------------- --------------
Earnings (loss) per common share $ 0.79 $ (1.04) $ (4.64)
=============== =============== ==============
Diluted earnings (loss) per common share -
Continuing operations $ 0.08 $ (0.36) $ (2.89)
Discontinued operations -- (0.68) (1.75)
--------------- --------------- --------------
Earnings (loss) per common share $ 0.08 $ (1.04) $ (4.64)
=============== =============== ==============
Basic weighted average common shares outstanding 22,154,861 20,510,345 17,657,913
=============== =============== ==============
Diluted weighted average common shares outstanding 29,232,568 20,510,345 17,657,913
=============== =============== ==============
See accompanying notes to consolidated financial statements.
24
STONEPATH GROUP, INC.
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
Years ended December 31, 2002, 2001 and 2000
Preferred stock, Preferred stock,
Series C Series D Common stock
------------------ ---------------- -------------------------------------------
Stonepath
Net Value, Inc. Group, Inc. Additional
------------------------------------------- paid-in
Shares Amount Shares Amount Shares Amount Shares Amount capital
--------- ------ ------- ------ ---------- ------- ---------- ------- ------------
Balances at December 31, 1999 -- $ -- -- $ -- 1,037,338 $ 1,038 15,522,807 $15,523 $103,946,136
Net loss -- -- -- -- -- -- -- -- --
Other comprehensive loss:
Unrealized loss on available-
for-sale securities -- -- -- -- -- -- -- -- --
Comprehensive loss
Issuance of warrants -- -- -- -- -- -- -- -- 7,391,691
Issuance of common stock,
net of cancellations -- -- -- -- 60,250 60 1,494,822 1,495 10,478,493
Issuance of preferred stock,
Series C, net 4,166,667 4,167 -- -- -- -- -- -- 40,878,920
Completion of in-process merger
with Net Value, Inc. -- -- -- -- (1,092,588) (1,093) 1,754,132 1,754 (661)
Contributed capital -- -- -- -- -- -- -- -- 853,319
Series B preferred stock
conversion -- -- -- -- -- -- 1,180,180 1,180 4,304,734
Series C preferred stock
conversion (779,793) (779) -- -- -- -- 779,793 779 --
Preferred stock dividends 270,196 269 -- -- -- -- -- -- 45,642,097
Treasury stock -- -- -- -- (5,000) (5) (312,200) (312) (1,203,044)
Compensatory common stock,
options and warrants
issued, net of cancellations -- -- -- -- -- -- -- -- (1,368,356)
Amortization of deferred
stock-based compensation -- -- -- -- -- -- -- -- --
--------- ------ ------- ----- ---------- ------- ---------- ------- ------------
Balances at December 31, 2000 3,657,070 3,657 -- -- -- -- 20,419,534 20,419 210,923,329
Net loss -- -- -- -- -- -- -- -- --
Other comprehensive income:
Unrealized gain on
available-for-sale securities -- -- -- -- -- -- -- -- --
Comprehensive loss
Issuance of contingent warrants -- -- -- -- -- -- -- -- 562,370
Exercise of options and warrants -- -- -- -- -- -- 200,000 200 199,800
Series C preferred stock
conversion (205,660) (206) -- -- -- -- 205,660 206 --
Preferred stock dividends 299,069 299 -- -- -- -- -- -- 3,588,529
Compensatory common stock,
options and warrants
issued, net of cancellations -- -- -- -- -- -- 77,916 78 (4,543,029)
Amortization of deferred
stock-based compensation -- -- -- -- -- -- -- -- --
--------- ------ ------- ----- ---------- ------- ---------- ------- ------------
Balances at December 31, 2001 3,750,479 3,750 -- -- -- -- 20,903,110 20,903 210,730,999
Net income -- -- -- -- -- -- -- -- --
Exercise of options and
warrants -- -- -- -- -- -- 440,808 441 424,740
Series C preferred stock
conversion (3,913,220) (3,913) 360,745 361 -- -- 2,109,496 2,109 (16,971,597)
Preferred stock dividends 162,741 163 -- -- -- -- -- -- 1,952,729
Compensatory warrants issued -- -- -- -- -- -- -- -- 95,000
Amortization of deferred
stock-based compensation -- -- -- -- -- -- -- -- 3,193
--------- ------ ------- ----- ---------- ------- ---------- ------- ------------
Balances at December 31, 2002 -- $ -- 360,745 $ 361 -- $ -- 23,453,414 $23,453 $196,235,064
========= ====== ======= ===== ========== ======= ========== ======= ============
See accompanying notes to consolidated financial statements.
25
STONEPATH GROUP, INC.
Consolidated Statements of Stockholders' Equity and Comprehensive
Income (Loss) (continued)
Years ended December 31, 2002, 2001 and 2000
Accumulated
other Deferred Total
Accumulated comprehensive stock-based comprehensive
deficit loss compensation Total income (loss)
------------ ------------- ------------ ------------ -------------
Balances at December 31, 1999 $(74,919,285) -- $(27,342,172) $ 1,701,240
Net loss 36,171,273 -- -- (36,171,273) $ (36,171,273)
Other comprehensive loss:
Unrealized loss on
available-for-sale securities -- (8,688) -- (8,688) (8,688)
-------------
Comprehensive loss $ (36,179,961)
=============
Issuance of warrants -- -- -- 7,391,691
Issuance of common stock, net of
cancellations -- -- -- 10,480,048
Issuance of preferred stock,
Series C, net -- -- -- 40,883,087
Completion of in-process merger with
Net Value, Inc. -- -- -- --
Contributed capital -- -- -- 853,319
Series B preferred stock conversion -- -- -- 4,305,914
Series C preferred stock conversion -- -- -- --
Preferred stock dividends (45,750,830) -- -- (108,464)
Treasury stock -- -- -- (1,203,361)
Compensatory common stock, options
and warrants issued, net of
cancellations -- -- 1,368,356 --
Amortization of deferred stock-based
compensation -- -- 15,202,092 15,202,092
------------- -------- ------------ ------------
Balances at December 31, 2000 (156,841,388) (8,688) (10,771,724) 43,325,605
Net loss (17,119,782) -- -- (17,119,782) $ (17,119,782)
Other comprehensive income:
Unrealized gain on
available-for-sale securities -- 8,688 -- 8,688 8,688
-------------
Comprehensive loss $ (17,111,094)
=============
Issuance of contingent warrants (562,370) -- -- --
Exercise of options and warrants -- -- -- 200,000
Series C preferred stock conversion -- -- -- --
Preferred stock dividends (3,588,828) -- -- --
Compensatory common stock, options
and warrants issued, net of
cancellations -- -- 4,845,297 302,346
Amortization of deferred stock-based
compensation -- -- 5,714,789 5,714,789
------------- -------- ------------ ------------
Balances at December 31, 2001 (178,112,368) -- (211,638) 32,431,646
Net income 2,380,329 -- -- 2,380,329 $ 2,380,329
=============
Exercise of options and warrants -- -- -- 425,181
Series C preferred stock conversion 16,973,040 -- -- --
Preferred stock dividends (1,952,892) -- -- --
Compensatory warrants issued -- -- -- 95,000
Amortization of deferred stock-based
compensation -- -- 95,232 98,425
------------- -------- ------------ ------------
Balances at December 31, 2002 $(160,711,891) $ -- $ (116,406) $ 35,430,581
============= ======== ============ ============
See accompanying notes to consolidated financial statements.
26
STONEPATH GROUP, INC.
Consolidated Statements of Cash Flows
Years ended December 31, 2002, 2001 and 2000
2002 2001 2000
----------- ------------ ------------
Cash flows from operating activities:
Net income (loss) $ 2,380,329 $(17,119,782) $(36,171,273)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 2,186,951 495,046 1,620,855
Stock-based compensation - continuing operations 98,425 2,394,106 3,395,755
Interest paid with common stock -- -- 216,511
Loss from disposal of furniture and equipment 4,560 101,126 --
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable (5,731,830) 1,205,807 --
Other assets (160,903) (133,499) (96,347)
Accounts payable and accrued expenses 639,201 (470,871) 87,696
Discontinued operations - working capital changes
and non-cash items -- 13,025,075 25,166,329
----------- ------------ ------------
Net cash used in operating activities (583,267) (502,992) (5,780,474)
----------- ------------ ------------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (10,497,306) (18,011,262) --
Purchases of furniture and equipment (1,812,750) (280,670) (232,488)
Proceeds from sale of furniture and equipment -- 32,926 --
Loans made (350,000) -- (350,000)
Discontinued operations:
Advances to affiliate companies -- (552,000) (2,004,841)
Collections on advances to affiliate companies -- 1,000,000 105,000
Purchase of available for sale securities -- (452,900) --
Proceeds from sale of available for sale securities -- 57,910 --
Acquisition of ownership interests in affiliate companies -- (200,000) (13,820,000)
Proceeds from sale of ownership interests in affiliate
companies 115,000 6,285,953 100,000
----------- ------------ ------------
Net cash used in investing activities (12,545,056) (12,120,043) (16,202,329)
----------- ------------ ------------
Cash flows from financing activities:
Issuance of common stock 425,181 200,000 1,099,602
Payment of equity financing fees (25,000) -- --
Payment of debt financing fees (233,580) -- --
Net repayments on short-term debt -- (1,448,786) (28,281)
Payment of long-term debt -- -- (79,034)
Issuance of preferred stock and warrants -- -- 48,274,760
Purchase and retirement of treasury stock -- -- (1,203,361)
Payment of preferred stock dividend, Series B -- -- (108,464)
----------- ------------ ------------
Net cash provided by (used in) financing
activities 166,601 (1,248,786) 47,955,222
----------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents (12,961,722) (13,871,821) 25,972,419
Cash and cash equivalents, beginning of year 15,227,830 29,099,651 3,127,232
----------- ------------ ------------
Cash and cash equivalents, end of year $ 2,266,108 $ 15,227,830 $ 29,099,651
=========== ============ ============
Cash paid for interest $ -- $ 4,102 $ 29,153
=========== ============ ============
Cash paid for income taxes $ 84,959 $ -- $ 2,586
=========== ============ ============
Supplemental disclosure of non-cash investing and financing activities:
Increase in goodwill related to accrued earn-out payments $ 3,879,856 $ -- $ --
=========== ============ ============
Issuance of warrants in connection with private placement $ 95,000 $ -- $ --
=========== ============ ============
See accompanying notes to consolidated financial statements.
27
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(1) Nature of Operations
Stonepath Group, Inc. and subsidiaries (the "Company") is a non-asset
based third-party logistics services company providing supply chain
solutions on a global basis. A full range of time-definite transportation
and distribution solutions is offered through its Domestic Services
platform, where the Company manages and arranges the movement of raw
materials, supplies, components and finished goods for its customers.
These services are offered through the Company's domestic air and ground
freight forwarding business. A full range of international logistics
services including international air and ocean transportation as well as
customs house brokerage services is offered through the Company's
International Services platform. In addition to these core service
offerings, the Company also provides a broad range of value added supply
chain management services, including warehousing, order fulfillment and
inventory management. The Company services a customer base of
manufacturers, distributors and national retail chains through a network
of offices in 18 major metropolitan locations in North America plus two
international locations, and an extensive network of over 200 independent
carriers and over 150 service partners strategically located around the
world.
(2) Restatement of Previously Reported Consolidated Financial Statements
In August 2003, the Company restated its consolidated financial statements
for the years ended December 31, 2001 and 2002 and the first two quarters
of 2003. That restatement related to (i) allocating more value to the
customer relationship intangible assets for the Company's acquisitions and
(ii) revising the amortization method and life used for such assets. The
amounts appearing in the accompanying consolidated balance sheets as of
December 31, 2002 and 2001, and the related consolidated statements of
operations and cash flows for the years then ended reflect the effect of
that restatement and are considered "previously reported" for purposes of
this Form 10-K/A.
During the third week of December 2003, and in the course of conducting a
regularly scheduled review of internal controls and centralization of the
financial reporting process, the Company discovered an error in the legacy
accounting process of its International Services division. Due to the
error in the legacy accounting process, the division failed to eliminate
in the consolidation process certain intercompany transactions between
Stonepath Logistics International Services, Inc. (formerly known as
"Global Transportation Systems, Inc.") and Global Container Line, Inc.,
its wholly-owned subsidiary which operates as a non-vessel operating
common carrier. This resulted in an overstatement of revenues and a
corresponding overstatement of the cost of transportation, with no
resulting impact on net revenues, EBITDA or net income. The Company has
determined that this error had been embedded in the legacy accounting
processes of Global Transportation Systems, Inc. for a period which began
substantially before its acquisition by the Company in April 2002.
The effects of this restatement on the previously reported consolidated
statement of operations for the year ended December 31, 2002 are
summarized below.
Year Ended
December 31, 2002
--------------------------------
As
Previously As
Reported Restated
-------------- ----------------
Selected Statement of Operations Data:
Total revenue $139,649,219 $122,787,625
Cost of transportation 101,339,024 84,477,430
28
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(3) Summary of Significant Accounting Policies
a) Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Stonepath Group, Inc., a Delaware corporation, and its
wholly owned subsidiaries. All intercompany balances and transactions
have been eliminated in consolidation.
b) Use of Estimates
The presentation of financial statements in accordance with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Such estimates include the assessment of the
recoverability of long-lived assets, specifically goodwill and
acquired intangibles, the establishment of an allowance for doubtful
accounts and the valuation allowance for deferred income tax assets.
Actual results could differ from those estimates.
c) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and investments in
money market funds and investment grade securities held with high
quality financial institutions. The Company considers all highly
liquid instruments with a remaining maturity of 90 days or less at
the time of purchase to be cash equivalents.
d) Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash investments
and accounts receivable.
The Company maintains its cash accounts with high quality financial
institutions. With respect to accounts receivable, such receivables
are primarily from manufacturers, distributors and major retailers
located in the United States. Credit is granted to customers on an
unsecured basis, and generally provides for 30-day payment terms. To
reduce credit risk, the Company performs ongoing credit evaluations
of its customers' financial conditions. Credit losses have not been
material.
For the years ended December 31, 2002 and 2001, our largest customer,
a national retail chain, accounted for approximately 29% and 53% of
our revenues, respectively, and approximately 27% and 48% of our
accounts receivable balance as of December 31, 2002 and 2001,
respectively. For the year ended December 31, 2002, our next five
largest customers accounted for approximately 21% of our revenue,
with no one of these customers accounting for greater than 10% of our
revenue.
e) Furniture and Equipment
Furniture and equipment are stated at cost, less accumulated
depreciation computed on a straight-line basis over the estimated
useful lives of the respective assets. Depreciation is computed using
three- to ten-year lives for furniture and office equipment, a
three-year life for computer software, the shorter of the lease term
or useful life for leasehold improvements and a three-year life for
vehicles. Upon retirement or other disposition of these assets, the
cost and related accumulated depreciation are removed from the
accounts and the resulting gain or loss, if any, is reflected in
results of operations. Expenditures for maintenance, repairs, and
renewals of minor items are charged to expense as incurred. Major
renewals and improvements are capitalized.
f) Goodwill
Goodwill consists of the excess of cost over the fair value of net
assets acquired in business combinations accounted for as purchases
(see Note 5).
29
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
The Company follows the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 requires an annual impairment test for goodwill
and intangible assets with indefinite lives. Under the provisions of
SFAS No. 142, the first step of the impairment test requires that the
Company determine the fair value of each reporting unit, and compare
the fair value to the reporting unit's carrying amount. To the extent
a reporting unit's carrying amount exceeds its fair value, an
indication exists that the reporting unit's goodwill may be impaired
and the Company must perform a second more detailed impairment
assessment. The second impairment assessment involves allocating the
reporting unit's fair value to all of its recognized and unrecognized
assets and liabilities in order to determine the implied fair value
of the reporting unit's goodwill as of the assessment date. The
implied fair value of the reporting unit's goodwill is then compared
to the carrying amount of goodwill to quantify an impairment charge
as of the assessment date. The Company performed its annual
impairment test during the fourth quarter of 2002 and noted no
impairment for either of its reporting units. In the future, the
Company expects to perform the annual test during its fiscal fourth
quarter unless events or circumstances indicate an impairment may
have occurred before that time.
g) Long-Lived Assets
Acquired intangibles consist of customer bases and non-compete
agreements arising from the Company's acquisitions.
The Company adopted the provisions of SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, on January 1, 2002.
SFAS No. 144 establishes accounting standards for the impairment of
long-lived assets such as property, plant and equipment and
intangible assets subject to amortization. The Company reviews
long-lived assets to be held-and-used for impairment whenever events
or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable. If the sum of the undiscounted
expected future cash flows over the remaining useful life of a
long-lived asset is less than its carrying amount, the asset is
considered to be impaired. Impairment losses are measured as the
amount by which the carrying amount of the asset exceeds the fair
value of the asset. When fair values are not available, the Company
estimates fair value using the expected future cash flows discounted
at a rate commensurate with the risks associated with the recovery of
the asset. Assets to be disposed of are reported at the lower of
carrying amount or fair value less costs to sell. The adoption of
SFAS No. 144 did not have a material impact on the Company's
consolidated financial statements.
h) Income Taxes
Taxes on income are provided in accordance with SFAS No. 109,
Accounting for Income Taxes. Deferred income tax assets and
liabilities are recognized for the expected future tax consequences
of events that have been reflected in the consolidated financial
statements. Deferred tax assets and liabilities are determined based
on the differences between the book values and the tax bases of
particular assets and liabilities and the tax effects of net
operating loss and capital loss carryforwards. Deferred tax assets
and liabilities are measured using tax rates in effect for the years
in which the differences are expected to reverse. A valuation
allowance is provided to offset the net deferred tax assets if, based
upon the available evidence, it is more likely than not that some or
all of the deferred tax assets will not be realized.
i) Revenue Recognition
The Company derives its revenues from three principal sources:
freight forwarding, customs brokerage, and warehousing and other
value added services.
As a freight forwarder, the Company is primarily a non-asset based
carrier that does not own or lease any significant transportation
assets. The Company generates the majority of its revenues by
purchasing transportation services from direct (asset-based) carriers
and using those services to provide transportation of property for
compensation to its customers. The Company is able to negotiate
favorable buy rates from the direct carriers by consolidating
shipments from multiple customers and concentrating its buying power,
while at the same time offering lower sell rates than most customers
would otherwise be able to negotiate themselves. When acting as an
indirect carrier, the Company will enter into a written agreement
with its customers or issue a tariff and a house bill of lading to
customers as the contract of carriage. When the freight is physically
tendered to a direct carrier, the Company receives a separate
contract of carriage, or master bill of lading. In order to claim for
any loss associated with the freight, the customer is first obligated
to pay the freight charges.
30
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
Based on the terms in the contract of carriage, revenues related to
shipments where the Company issues a house bill of lading are
recognized when the freight is delivered to the direct carrier at
origin. Costs related to the shipment are also recognized at this
same time.
All other revenues, including revenues for customs brokerage and
warehousing and other value added services, are recognized upon
completion of the service.
j) Stock-Based Compensation
As permitted by SFAS No. 123, Accounting for Stock-Based
Compensation, the Company has elected to account for stock-based
compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion ("APB") No. 25, Accounting for
Stock Issued to Employees, and related interpretations. Accordingly,
compensation cost for stock options granted to employees and members
of the board of directors is measured as the excess, if any, of the
quoted market price of the Company's common stock at the date of the
grant over the amount the grantee must pay to acquire the stock. The
Company accounts for stock-based compensation to non-employees
(including directors who provide services outside their capacity as
members of the board) in accordance with SFAS No. 123 and Emerging
Issues Task Force ("EITF") Issue No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services. The Company has
implemented the disclosure provisions of SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure.
The table below illustrates the effect on net income (loss)
attributable to common stockholders and income (loss) per share as if
the fair value of options granted had been recognized as compensation
expense in accordance with the provisions of SFAS No. 123. See Notes
12 and 13 for additional information regarding options and warrants.
Year ended December 31: 2002 2001 2000
------------- -------------- ----------------
Net income (loss) attributable to common stockholders:
As reported $ 17,400,477 $ (21,270,980) $ (81,922,103)
Add: stock-based employee compensation expense included
in reported net income (loss), net of tax 92,566 5,713,168 7,584,654
Deduct: Total stock-based compensation expense
determined under fair value method for all awards,
net of tax (1,922,051) (10,040,316) (6,517,739)
------------ ------------- --------------
Pro forma $ 15,570,992 $ (25,598,128) $ (80,855,188)
============ ============= ==============
Basic earnings (loss) per common share:
As reported $0.79 $(1.04) $(4.64)
Pro forma 0.70 (1.25) (4.58)
Diluted earnings (loss) per common share:
As reported $0.08 $(1.04) $(4.64)
Pro forma 0.02 (1.25) (4.58)
k) Earnings (Loss) Per Share
Basic earnings (loss) per common share and diluted earnings (loss)
per common share are presented in accordance with SFAS No. 128,
Earnings per Share. Basic earnings (loss) per common share has been
computed using the weighted-average number of shares of common stock
outstanding during the period. Diluted earnings (loss) per common
share incorporates the incremental shares issuable upon the assumed
exercise of stock options and warrants and upon the assumed
conversion of the Company's preferred stock, if dilutive. Certain
stock options, stock warrants, and convertible securities were
excluded because their effect was antidilutive. The total numbers of
such shares excluded from diluted earnings (loss) per common share
are 1,336,825, 9,755,934 and 12,197,618 at December 31, 2002, 2001
and 2000, respectively.
31
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
During the years ended December 31, 2001 and 2000, the diluted loss
per common share calculation was the same as the basic loss per
common share calculation, as all potentially dilutive securities were
anti-dilutive. The following table indicates the calculation of
earnings per share for the year ended December 31, 2002:
Net Per Share
Income Shares Amount
------------- ---------- -----------
Net income $ 2,380,329
Less: Preferred stock dividend (1,952,892)
Plus: Redemption of Series C Preferred Stock in exchange transaction (see
Note 12) 16,973,040
-------------
Basic Earnings per Common Share
Net income attributable to common stockholders 17,400,477 22,154,861 $ 0.79
=========
Effect of Dilutive Securities
Options and warrants -- 3,331,275
Convertible preferred stock (15,020,148) 3,746,432
------------- ----------
Diluted Earnings Per Common Share
Net income attributable to common stockholders plus assumed conversions $ 2,380,329 29,232,568 $ 0.08
============= ========== =========
l) New Accounting Pronouncements
On January 1, 2002, the Company adopted SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, which establishes
criteria and methodologies for the measurement, recognition and
classification of long-lived assets. The adoption of SFAS No. 144 did
not have a material impact on the Company's consolidated financial
statements.
In June 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities, requiring companies to recognize liabilities and
costs associated with exit or disposal activities initiated after
December 31, 2002 when they are incurred, rather than when management
commits to an exit or disposal plan. SFAS No. 146 also requires that
such liabilities be measured at fair value. SFAS No. 146 had no
impact on the Company's consolidated financial statements but may
affect the measurement and recognition of any future restructuring
activities.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure of Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, which elaborates on
the existing disclosure requirements for guarantees and provides
clarification on when a company must measure and recognize a
liability related to guarantees issued. The disclosure requirements
of Interpretation No. 45 are effective for the Company's consolidated
financial statements for the year ended December 31, 2002. The
measurement and recognition provisions are to be applied on a
prospective basis for guarantees issued or modified after December
31, 2002. The adoption of Interpretation No. 45 did not require
additional disclosures in 2002 and is not expected to impact the
Company's consolidated financial statements as the Company does not
typically issue guarantees related to third-party indebtedness or
performance.
In December 2002, the FASB issued SFAS No. 148, which (i) amends SFAS
No. 123, to provide alternative methods of transition for an entity
that voluntarily changes to the fair value based method of accounting
for stock-based employee compensation, (ii) amends the disclosure
provisions of SFAS No. 123 to require prominent disclosure about the
effects on reported net income of an entity's accounting policy
decisions with respect to stock-based employee compensation and (iii)
amends APB Opinion No. 28, Interim Financial Reporting, to require
disclosure about those effects in interim financial information.
Items (ii) and (iii) in the new requirements of SFAS No. 148 are
effective for financial statements for fiscal years ending after
December 15, 2002. The Company intends to continue to account for its
stock-based compensation in accordance with APB Opinion No. 25.
32
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities, which provides new guidance with
respect to the consolidation of all unconsolidated entities,
including special purpose entities. The adoption of Interpretation
No. 46 in 2003 is not expected to impact the Company's consolidated
financial statements as the Company does not have investments in any
unconsolidated special purpose or variable interest entities.
m) Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year presentation.
(4) 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. In October
1998, in the first stage of a two-step process the Company acquired a
controlling interest in a developer and distributor of online promotional
campaigns named Net Value, Inc. ("Net Value"). This acquisition was
accounted for as a recapitalization of Net Value. In November 2000, the
Company completed the merger with Net Value by issuing 1,754,140 shares of
its common stock for the remaining minority interest in Net Value.
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. 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 consolidated
financial statements of prior periods have been reclassified to reflect
this presentation. The Company has never recognized any revenues from its
former business model. Pre-tax operating losses amounting to $13,862,713
and $30,815,850 are reflected in the accompanying consolidated statements
of operations as loss from discontinued operations for the years ended
December 31, 2001 and 2000, respectively.
The net assets of discontinued operations relate primarily to investments
in early-stage technology companies. The Company anticipates disposing of
its remaining investment during 2003.
(5) Acquisitions
On October 5, 2001, the Company acquired all of the outstanding shares of
M.G.R., Inc., d/b/a Air Plus Limited, and its operating affiliates
(collectively, "Air Plus"), a group of Minneapolis-based privately held
companies. The results of Air Plus' operations have been included in the
consolidated financial statements since that date. Air Plus provides a
full range of logistics and transportation services throughout North
America. As a result of the acquisition, the Company completed the first
step in its plan to become a leading provider of logistics and
transportation services.
The acquisition was accounted for as a purchase in accordance with SFAS
No. 141, Business Combinations. As consideration for the stock of Air
Plus, the Company paid $17,500,000. In addition, contingent consideration
in the amount of $17,000,000, which is payable in installments of
$3,000,000 in 2003, $5,000,000 in 2004, $5,000,000 in 2005 and $4,000,000
in 2006, will be paid if Air Plus achieves pre-tax income of $6,000,000 in
each of the years preceding the year of payment. Such payments, if made,
will be reflected as additional goodwill. In the event that there is a
shortfall in pre-tax income in any year, such shortfall may be carried
over to the succeeding year or carried back to the preceding year to the
extent that the pre-tax income in those years exceeds the $6,000,000
level. Any remaining shortfall will reduce the contingent consideration on
a dollar-for-dollar basis. The total purchase price, including acquisition
costs of $1,254,000 but excluding the contingent consideration described
above, was $18,754,000. The Company obtained an independent third-party
appraisal of the fair value of the acquired intangible assets. The
following table summarizes the estimated fair value of the assets acquired
and liabilities assumed at the date of the acquisition:
33
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
As of
October 5, 2001
---------------
(in thousands)
Current assets $ 9,651
Furniture and equipment 1,538
Other assets 448
Intangible assets 4,615
Goodwill 10,823
--------
Total assets acquired 27,075
--------
Current liabilities 8,321
--------
Total liabilities assumed 8,321
--------
Net assets acquired $ 18,754
========
The acquired intangible assets have a weighted average useful life of ten
years. The intangible assets include a customer relationship intangible of
$4,415,000 which is being amortized under the declining balance method
using a 25% rate and a covenant-not-to-compete of $200,000 with a
three-year life. The $10,823,000 of goodwill was assigned to the Company's
domestic business unit and is deductible for income tax purposes.
On April 4, 2002, the Company acquired all of the issued and outstanding
common shares of Global Transportation Services, Inc. ("Global"), a
Seattle-based privately held company that provides a full range of
international air and ocean logistics services, for $5,000,000 in cash
paid at the closing and up to an additional $7,000,000 payable over a five
year earn-out period based upon the future financial performance of
Global. The Company agreed to pay the former Global shareholders a total
of $5,000,000 base earn-out payments in installments of $745,000 in 2003,
$1,000,000 in 2004 through 2007 and $255,000 in 2008, with each
installment payable in full if Global achieves pre-tax income of
$2,000,000 in each of the years preceding the year of payment (or the pro
rata portion thereof in 2002 and 2007). In the event there is a shortfall
in pre-tax income, the earn-out payment will be reduced on a pro-rata
basis. Shortfalls may be carried over or carried back to the extent that
pre-tax income in any other payout year exceeds the $2,000,000 level. The
Company has also provided former Global shareholders with additional
incentive to generate earnings in excess of the base $2,000,000 annual
earnings target ("tier-two earn-out"). Under Global's tier-two earn-out,
former Global shareholders are also entitled to receive 40% of the
cumulative pre-tax earnings in excess of $10,000,000 generated during the
five year earn-out period subject to a maximum additional earn-out
opportunity of $2,000,000. Global would need to generate cumulative
earnings of $15,000,000 over the five year earn-out period to receive the
full $7,000,000 in contingent earn-out payments. With the closing of the
transaction, the Company established its international platform for
services between the Far East, the United States and Europe.
The acquisition was accounted for as a purchase and accordingly, the
results of operations and cash flows of Global are included in the
accompanying consolidated financial statements prospectively from the date
of acquisition. The total purchase price, including acquisition costs of
$466,000 but excluding the contingent consideration described above, was
$5,466,000. The Company obtained an independent third-party appraisal of
the fair value of the acquired intangibles. The following table summarizes
the estimated fair value of assets acquired and liabilities assumed at the
date of the acquisition:
34
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
As of
April 4, 2002
---------------
(in thousands)
Current assets $ 3,664
Furniture and equipment 169
Other assets 149
Intangible asset 340
Goodwill 4,463
-----------
Total assets acquired 8,785
-----------
Current liabilities 3,319
-----------
Total liabilities assumed 3,319
-----------
Net assets acquired $ 5,466
===========
The acquired intangible asset is a covenant-not-to-compete which has a
useful life of five years. The $4,463,000 of goodwill was assigned to the
Company's international business unit and is deductible for income tax
purposes.
On May 30, 2002, the Company acquired all of the issued and outstanding
common shares of United American Acquisitions and Management, Inc. d/b/a
United American Freight Services, Inc. ("United American"), a
Detroit-based privately held provider of expedited transportation
services. The United American transaction provided the Company with a new
time-definite service offering focused on the automotive industry. The
purchase price was $5,100,000 in cash at closing and up to an additional
$11,000,000 payable over a four-year earn-out period based upon the future
financial performance of United American. The Company agreed to pay the
former United American shareholder a total of $5,000,000 base earn-out
payments in installments of $1,250,000 in 2003 through 2006, with each
installment payable in full if United American achieves pre-tax income of
$2,200,000 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 payout year exceeds the $2,200,000 level. The Company
has also provided the former United American shareholder with additional
incentive to generate earnings in excess of the base $2,200,000 annual
earnings target ("tier-two earn-out"). Under United American's tier-two
earn-out, the former United American shareholder is also entitled to
receive 50% of the cumulative pre-tax earnings generated from a certain
pre-acquisition customer in excess of $8,800,000 generated during the four
year earn-out period subject to a maximum additional earn-out opportunity
of $6,000,000. United American would need to generate cumulative earnings
of $20,800,000 over the four year earn-out period to receive the full
$11,000,000 in contingent earn-out payments.
The acquisition was accounted for as a purchase and accordingly, the
results of operations and cash flows of United American are included in
the accompanying consolidated financial statements prospectively from the
date of acquisition. The total purchase price, including acquisition costs
of $48,000 but excluding the contingent consideration described above, was
$5,148,000. The following table summarizes the estimated fair value of
assets acquired and liabilities assumed at the date of the acquisition:
35
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
As of
May 30, 2002
--------------
(in thousands)
Current assets $ 5,150
Furniture and equipment 161
Other assets 88
Intangible assets 1,625
Goodwill 1,235
----------
Total assets acquired 8,259
----------
Current liabilities 3,111
----------
Total liabilities assumed 3,111
----------
Net assets acquired $ 5,148
==========
The acquired intangible assets have a weighted average useful life of ten
years. The intangible assets include a customer relationship intangible of
$1,525,000, which is being amortized under the declining balance method
using a 25% rate and a covenant-not-to-compete of $100,000 with a
three-year life. The $1,235,000 of goodwill was assigned to the Company's
domestic business unit and is deductible for income tax purposes.
On October 1, 2002, the Company acquired Transport Specialists, Inc.
("TSI"), a Northern Virginia-based privately held provider of expedited
domestic and international transportation services. The TSI transaction is
intended to capitalize on TSI's existing base of government contract work
in the Washington metropolitan area and serve as a supplement to an
existing Company-operated facility in that area. The purchase price
consisted of cash of $526,000 paid at closing, and a three-year earn-out
arrangement based upon the future financial performance of TSI. The
Company agreed to pay the former TSI shareholder $200,000 for each year in
the three-year earn-out period ending December 31, 2005 that TSI achieves
its annual net revenue target of $1,620,000. The acquisition was accounted
for as a purchase and accordingly, the results of operations and cash
flows of TSI are included in the accompanying consolidated financial
statements prospectively from the date of acquisition. In connection with
this transaction, the Company recorded intangible assets and
tax-deductible goodwill amounting to $160,000 and $56,000, respectively.
The primary reasons for the acquisitions of Air Plus, Global and United
American (the "material acquisitions") and the factors that contributed to
the recognition of goodwill are that the acquired entities: 1) established
or expanded the domestic and international platforms, 2) had experienced,
well-trained workforces, 3) expanded the Company's time-definite service
offerings, and 4) strategically broadened the geographical dispersion of
the Company's service facilities. The Company expects, through
cross-selling and other initiatives, to increase the acquired entities'
revenues and profitability through an expansion of the value added
services that it offers. In addition, the Company expects to reduce the
operating expenses of the acquired entities through economies of scale and
synergies, such as the centralization of certain administrative functions.
By creating a larger, stronger organization, the Company expects to
improve its access to, and the availability of, future capital.
36
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
The following unaudited pro forma information is presented as if the
material acquisitions had occurred on January 1, 2001 (in thousands):
Years ended December 31,
-------------------------------
Restated Restated
2002 2001
------------- -------------
Total revenue $ 145,902 $ 119,857
============= =============
Net revenue $ 45,154 $ 37,402
============= =============
Net income $ 4,369 $ 1,782
============= =============
Net income (loss) attributable
to common stockholders $ 19,389 $ (2,369)
============= =============
Basic earnings (loss) per common share $ 0.88 $ (0.12)
============= =============
Diluted earnings (loss) per common share $ 0.15 $ (0.12)
============= =============
For the year ended December 31, 2002, the former shareholders of Air Plus,
Global and United American achieved earn-out payments of $3,000,000,
$745,206 and $222,150, respectively. Excess earnings (shortfalls) carried
forward to 2003 amount to approximately $338,000, $2,324,000 and
$(1,028,000) for Air Plus, Global and United American, respectively.
(6) Acquired Intangible Assets
Information with respect to acquired intangible assets is as follows:
December 31,
-----------------------------------------------------------------
2002 2001
------------------------------- -------------------------------
Gross
Gross Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
--------------- -------------- -------------- ---------------
Amortizable intangible assets:
Customer relationship $ 5,980,000 $ 1,533,667 $ 4,415,000 $ 276,000
Covenants-not-to-compete 760,000 163,778 200,000 16,667
------------- ------------- ------------- --------------
Total $ 6,740,000 $ 1,697,445 $ 4,615,000 $ 292,667
============= ============= ============= ==============
Aggregate amortization expense:
For the year ended December 31, 2002 $ 1,404,778
==============
Estimated aggregate amortization expense:
For the year ended December 31, 2003 $ 1,313,000
For the year ended December 31, 2004 1,020,000
For the year ended December 31, 2005 735,000
For the year ended December 31, 2006 535,000
For the year ended December 31, 2007 369,000
37
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(7) Furniture and Equipment
Furniture and equipment consists of the following:
December 31,
--------------------------
2002 2001
------------ ------------
Furniture and office equipment $ 2,761,837 $ 1,290,469
Computer software 986,942 512,593
Leasehold improvements 400,968 95,419
Vehicles 40,167 21,697
------------ ------------
4,189,914 1,920,178
Less: accumulated depreciation (956,237) (182,575)
------------ ------------
$ 3,233,677 $ 1,737,603
============ ============
(8) Revolving Credit Facility
To ensure adequate financial flexibility, the Company secured a
$15,000,000 revolving credit facility (the "Facility") in May 2002, which
is collateralized by the accounts receivable and the other assets of the
Company and its subsidiaries. The Facility requires the Company and its
subsidiaries to meet certain financial objectives and comply with certain
financial covenants and limits to four the number of acquisitions the
Company may make per year. The Company may use advances under the Facility
to finance future acquisitions, capital expenditures or other corporate
purposes. At the time of borrowing, the Company has the option to elect to
pay interest at a rate equal to LIBOR plus 2.25% or the prime rate. The
Company also pays a commitment fee of 0.5% per annum on the average unused
balance of the Facility. At December 31, 2002, based on available
collateral and an outstanding $160,000 letter of credit commitment, there
was $14,840,000 available for borrowing under the Facility.
(9) Income Taxes
Deferred income tax assets and liabilities are classified as current and
noncurrent based on the financial reporting classification of the related
assets and liabilities that give rise to the temporary difference. The tax
effects of temporary differences that give rise to the Company's deferred
tax accounts are as follows:
December 31,
---------------------------------
2002 2001
--------------- --------------
Deferred tax assets:
Accruals $ $
52,000 141,000
Equity in losses of affiliate companies 432,000 578,000
Amortization and depreciation -- 129,000
Deferred compensation and warrants 11,066,000 11,540,000
Capital loss carryforward 2,475,000 2,314,000
Federal and state deferred tax benefits
arising from net operating loss carryforwards 8,922,000 9,448,000
-------------- --------------
Total 22,947,000 24,150,000
Less: valuation allowance (22,852,000) (24,150,000)
-------------- --------------
Net deferred tax assets 95,000 --
Deferred tax liabilities:
Amortization and depreciation (95,000) --
-------------- --------------
Net deferred taxes $ -- $ --
============== ==============
Due to the uncertainty surrounding the realization of the Company's tax
attributes in future income tax returns, the Company has placed a
valuation allowance against its otherwise recognizable deferred tax
assets. Management continually reassesses the realizability of the
Company's deferred tax assets and, based on a number of factors, has
concluded that it is more likely than not that the benefit of the
Company's deferred tax assets would not be realized.
38
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
The net change in total valuation allowance for the years ended December
31, 2002 and 2001 was a decrease of $1,298,000 and an increase of
$5,098,000, respectively. As of December 31, 2002, the Company had net
operating loss carryforwards for federal and state income tax purposes
amounting to approximately $21,687,000 and $16,233,000, respectively. For
the year ended December 31, 2002 the Company had net income from
continuing operations which resulted in the use of past net operating loss
carryforwards for federal and state income tax purposes amounting to
approximately $900,000 each. The federal net operating loss carryforwards
expire beginning 2018 through 2021, and the state net operating loss
carryforwards expire beginning in 2004. The use of certain net operating
losses may be subject to annual limitations based on changes in the
ownership of the Company's common stock, as defined by Section 382 of the
Internal Revenue Code.
Income tax expense is as follows: Years ended December 31,
------------------------------------
2002 2001
--------------- ---------------
Current:
Federal $ -- $ --
State 101,877 --
--------------- --------------
$ 101,877 $ --
=============== ==============
The difference between the statutory federal income tax rate and the
Company's effective income tax rate is principally due to state income
taxes, the utilization of net operating loss carryforwards and changes in
the valuation allowance for all years presented.
(10) Commitments
Employment Agreements
At December 31, 2002, the Company had employment agreements with three of
its officers for an aggregate annual base salary of $760,000 plus bonus
and increases in accordance with the terms of the agreements. The
contracts are for three-year terms.
Leases
The Company leases equipment, office and warehouse space under operating
leases expiring at various times through 2010. Total rent expense related
to continuing operations for the years ended December 31, 2002, 2001 and
2000 was $4,750,000, $969,000 and $72,000, respectively. Future minimum
lease payments are as follows:
Year ending
December 31, Third-party Related Party Total Subrentals Net
------------ ----------- ------------- ----- ---------- ---
2003 $ 3,778,000 $144,000 $ 3,922,000 $(140,000) $ 3,782,000
2004 3,055,000 144,000 3,199,000 (141,000) 3,058,000
2005 2,643,000 72,000 2,715,000 (47,000) 2,668,000
2006 1,390,000 -- 1,390,000 -- 1,390,000
2007 1,045,000 -- 1,045,000 -- 1,045,000
Thereafter 611,000 -- 611,000 -- 611,000
----------- -------- ----------- --------- -----------
Total $12,522,000 $360,000 $12,882,000 $(328,000) $12,554,000
=========== ======== =========== ========= ===========
Employee Benefit Plan
The Company sponsors voluntary defined contribution savings plans covering
all U.S. employees. Company contributions are discretionary. For the years
ended December 31, 2002 and 2001, total Company contributions amounted to
$260,000 and $37,500, respectively. No contributions were made in the year
ended December 31, 2000.
39
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(11) Contingencies
Purchase Agreements
Assuming minimum pre-tax income levels are achieved by Air Plus, Global,
United American and TSI, the Company will be required to make future
contingent consideration payments by April 1 of the respective year as
follows (in thousands):
2004 2005 2006 2007 2008 Total
-------- --------- -------- -------- ------- -------
Air Plus $5,000 $5,000 $4,000 $ -- $ -- $14,000
Global 1,000 1,000 1,000 1,000 255 4,255
United 1,250 1,250 1,250 -- -- 3,750
TSI 200 200 200 -- -- 600
------ ------ ------ ------ ---- -------
Total $7,450 $7,450 $6,450 $1,000 $255 $22,605
====== ====== ====== ====== ==== =======
In addition, during the 2003-2007 earn-out period, there is an additional
contingent obligation related to tier-two earn-outs that could be as much
as $8,000,000 if the applicable acquired companies generate an incremental
$17,000,000 in pre-tax earnings.
Legal Proceedings
On October 12, 2000, Emergent Capital Investment Management, LLC
("Emergent") filed suit against the Company and two of its officers
contending that it was misled by statements made by the defendants in
connection with the offering of the Company's Series C Preferred Stock
which closed in March 2000. Specifically, Emergent alleges that it is
entitled to rescind the transaction because it was allegedly represented
that the size of the offering would be $20,000,000 and the Company
actually raised $50,000,000. Emergent seeks a return of its $2,000,000
purchase price of Series C shares. In June of 2001, the Company moved for
summary judgment in this case.
After the summary judgment motion was filed, Emergent filed a second
action against the Company and two of its officers alleging different
allegations of fraud in connection with the Series C offering. In the new
complaint, Emergent alleges that oral statements and written promotional
materials distributed by the Company at a meeting in connection with the
Series C offering were materially inaccurate with respect to the Company's
investment in Net Value, Inc., a wholly owned subsidiary of the Company.
Emergent also contends that the defendants failed to disclose certain
allegedly material transactions in which an officer was involved prior to
his affiliation with the Company. The Company filed a motion to dismiss
this new action for failure to state a claim upon which relief can be
granted.
On October 2, 2001, the Court entered an order granting summary judgment
to the defendants in the first case filed by Emergent and dismissing
Emergent's second complaint for failure to state a claim upon which relief
can be granted. The Court allowed Emergent 20 days to file a second
amended complaint as to the second action only. On October 21, 2001,
Emergent did file a second amended complaint in the second action. The
second amended complaint does not raise any new factual allegations
regarding Emergent's participation in the offering.
The Company filed a motion to dismiss Emergent's second amended complaint.
On April 15, 2002, the United States District Court for the Southern
District of New York entered an order granting the motion to dismiss
Emergent's second amended complaint against the Company and its former
officers. The Court refused to grant Emergent an additional opportunity to
re-plead its claims against the defendants and a final order dismissing
the matter has been entered. Emergent thereafter filed a notice of appeal
to the United States Court of Appeals for the Second Circuit, which is
currently pending. The Company believes that it has substantial defenses
to the plaintiff's claims and intends to vigorously defend this action. No
accrual has been established for this proceeding since (i) the Company
believes it has substantial defenses to the plaintiff's claims, and (ii)
the amount of the loss, if any, cannot be reasonably estimated.
Notwithstanding the Company's belief, there can be no assurances, however,
that the Company will not incur material expenses in the defense and
resolution of this matter.
40
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
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 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 $20,000,000, 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. Discovery in this case has concluded, and the Company
recently filed a motion for summary judgment as to all counts of the
complaint. This motion has been briefed and is pending. The Company
believes it has substantial defenses to the remaining claims and intends
to defend the matter vigorously. No accrual has been established for this
proceeding since (i) the Company believes it has substantial defenses to
the plaintiffs' claims, and (ii) the amount of the loss, if any, cannot be
reasonably estimated. Notwithstanding the Company's belief, there can be
no assurances, however, that the Company will not incur material expenses
in the defense and resolution of this matter.
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 the Company's consolidated financial position, results of
operations or liquidity. No accruals have been established for any pending
legal proceedings.
(12) Stockholders' Equity
The Company has two classes of authorized stock: common stock and
preferred stock.
(a) Common Stock
The Company is authorized to issue 100,000,000 shares of common stock,
par value $.001 per share. The holders of common stock are entitled to
one vote per share and are entitled to dividends as declared. Dividends
are subject to the preferential rights of the holders of the Company's
preferred stock. The Company has never declared dividends on its common
stock.
(b) Preferred Stock
The Company's Board of Directors has the authority, without further action
by the stockholders, to issue up to 10,000,000 shares of preferred stock,
par value $.001 per share, that may be issued in one or more series and
with such terms as may be determined by the Board of Directors.
Series B Preferred Stock
In September 1999, the Company issued 4,824 shares of Series B Preferred
Stock for aggregate proceeds of $4,824,000. The Series B Preferred Stock
was subsequently converted into 1,180,180 shares of common stock in
February 2000 pursuant to the original terms of the issuance.
In connection with the issuance of the Series B Preferred Stock, the
Company issued warrants to purchase 295,040 shares of common stock (Series
B Warrants). These warrants were exercisable at prices ranging from 110%
to 140% of the conversion price of the Series B Shares. The Company
allocated $650,000 of the net proceeds received from this offering to the
cost of the Series B Warrants based on an independent valuation. During
2000, the warrant holders exercised 210,944 Series B Warrants, resulting
in cash proceeds to the Company of $1,077,792. The remaining 84,096 Series
B Warrants expired on August 1, 2000.
Series C Preferred Stock
In March 2000, the Company completed a private placement transaction in
which it issued 4,166,667 shares of Series C Preferred Stock and warrants
to purchase 416,667 additional shares of common stock for aggregate gross
proceeds of $50,000,000.
41
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
The terms of the Series C Preferred Stock initially required the Company
to use the proceeds from this offering solely for investments in early
stage Internet companies. In February 2001, the Company received consents
(the "Consents") from the holders of more than two-thirds of its issued
and outstanding shares of Series C Preferred Stock to modify this
restriction to permit it to use the proceeds to make any investments in
the ordinary course of business, as from time-to-time determined by the
Board of Directors, or for any other business purpose approved by the
Board of Directors.
In exchange for the Consents, the Company agreed to a private exchange
transaction (the "Exchange Transaction") in which it would issue to the
holders of the Series C Preferred Stock as of July 18, 2002 (the
"conversion date"), additional warrants to purchase up to a maximum of
2,692,194 shares of common stock at an exercise price of $1.00 per share,
and reduce the per share exercise price from $26.58 to $1.00 for 307,806
existing warrants owned by the holders of the Series C Preferred Stock. As
a condition to receiving the additional warrants and having their existing
warrants re-priced, the holders of the Series C Preferred Stock agreed to
convert their shares of preferred stock into shares of common stock on the
conversion date.
At the request of the largest holder of Series C Preferred Stock (because
of legal limitations in its governing instruments which prevent it from
holding investments in common stock), the Company expanded the Exchange
Transaction to include an additional alternative. Holders of the Series C
Preferred Stock as of the conversion date were provided with the
alternative of exchanging the common stock issuable upon conversion of the
Series C Preferred Stock, the additional warrants and re-priced warrants,
for shares of a newly designated Series D Convertible Preferred Stock.
As a result of the exercise of these rights by the holders of the Series C
Preferred Stock, as of July 19, 2002, all of the Company's shares of
Series C Preferred Stock, representing approximately $44,600,000 in
liquidation preferences, together with warrants to purchase 149,457 shares
of the Company's common stock, were surrendered and retired in exchange
for a combination of securities consisting of:
o 1,911,071 shares of common stock;
o 1,543,413 warrants to purchase common stock at an exercise price
of $1.00; and
o 360,745 shares of Series D Convertible Preferred Stock.
The 1,911,071 shares of common stock and the 1,543,413 warrants to
purchase shares of common stock at an exercise price of $1.00 were issued
in exchange for 1,911,071 shares of Series C Preferred Stock and warrants
to purchase 158,348 shares of the Company's common stock at an exercise
price of $26.58 per share. The exchange of the common stock for the Series
C Preferred Stock was accounted for as a conversion of the Series C
Preferred Stock pursuant to its terms. The estimated fair value of the
additional warrants and the re-priced warrants had been previously
recorded by the Company in 2001 as a dividend, so no further amount was
recorded in 2002.
The remaining 1,803,725 shares of Series C Preferred Stock were converted
into 1,803,725 shares of common stock. In addition, the Company issued
1,307,130 additional warrants to purchase shares of common stock at an
exercise price of $1.00 per share and re-priced 149,457 warrants to
purchase shares of the Company's common stock (the re-priced warrants were
re-priced from an exercise price of $26.58 per share to an exercise price
of $1.00 per share). The common stock, additional warrants and re-priced
warrants were then immediately surrendered by the holders in exchange for
360,745 shares of Series D Convertible Preferred Stock.
EITF Topic D-42, The Effect on the Calculation of Earnings per Share for
the Redemption or Induced Conversion of Preferred Stock, indicates that
the excess of the carrying amount of preferred stock over the fair value
of the consideration transferred to the holders of the preferred stock
should be added to net earnings. The Series C Preferred Stock which was
converted into Series D Convertible Preferred Stock had a carrying value
of approximately $21,645,000. The Company obtained an independent
appraisal which valued the Series D Convertible Preferred Stock at
approximately $4,672,000. The excess of the carrying value of the Series C
Preferred Stock over the fair value of the Series D Convertible Preferred
Stock was added to net income for purposes of computing net income
attributable to common stockholders for the year ended December 31, 2002.
The Exchange Transaction had no effect on the cash flows of the Company.
42
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
The holders of the Series C Preferred Stock earned 162,741, 299,069 and
270,196 additional shares of Series C Preferred Stock from payment of
preferred stock dividends during the years ended December 31, 2002, 2001
and 2000, respectively. No further preferred stock dividends are payable
on the Series C Preferred Stock after July 18, 2002. At December 31, 2002
no shares of Series C Preferred Stock were outstanding due to the
completion of the Exchange Transaction.
Series D Convertible Preferred Stock
The Series D Convertible Preferred Stock is convertible into 3,607,450
shares of common stock of the Company. The conversion terms were
negotiated to be similar to the terms of the Exchange Transaction. In the
event of any liquidation, dissolution or winding-up of the Company prior
to December 31, 2003 (which also includes certain mergers, consolidations
and asset sale transactions), holders of the Series D Convertible
Preferred Stock are entitled to a liquidation preference equal to $60.00
per share, paid prior to and in preference to any payment made or set
aside for holders of common stock, but subordinate and subject in
preference to the prior payment in full of all amounts to which holders of
other classes of preferred stock may be entitled to receive as a result of
such liquidation, dissolution or winding-up. Subsequent to December 31,
2003, the holders of the Series D Convertible Preferred Stock are entitled
to participate in all liquidation distributions made to the holders of the
Company's common stock on an as-if converted basis. The Series D
Convertible Preferred Stock carries no dividend, and, except under limited
circumstances, has no voting rights except as required by law. By no later
than December 31, 2004, the Series D Convertible Preferred Stock will
convert into shares of the Company's common stock.
Preferred Stock Dividends
The components of the preferred stock dividends are as follows:
2002 2001 2000
-------------- -------------- --------------
Series B Preferred Stock cash dividend $ -- $ -- $ (108,464)
Series C Preferred Stock dividend payable in kind (1,952,892) (3,588,828) (3,034,039)
Non-cash credit: excess of carrying value of
Series C Preferred Stock over the fair value of
Series D Convertible Preferred Stock 16,973,040 -- --
Non-cash charge: issuance of contingent warrants -- (562,370) --
Non-cash charge: beneficial conversion feature on
Series C Preferred Stock -- -- (42,608,327)
-------------- -------------- --------------
$ 15,020,148 $ (4,151,198) $ (45,750,830)
============== ============== ==============
The Company paid the Series B Preferred Stock dividend in cash as the
holders converted their Series B Preferred Stock into shares of the
Company's common stock. The Series C Preferred Stock dividend was payable
in additional Series C Preferred Stock on a quarterly basis and therefore
did not represent a cash obligation of the Company.
At the time of issuance of the Series C Preferred Stock, the quoted market
value of the Company's common stock was higher than the Series C Preferred
Stock sales price of $12.00 per share. As the Series C Preferred Stock was
immediately convertible into shares of the Company's common stock, the
differential in price constituted a beneficial conversion feature as
defined in EITF Issue No. 98-5, Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios. Accordingly, the Company recorded $42,608,327 as additional paid
in capital for the deemed preferential dividend related to the beneficial
conversion feature. In accordance with EITF Issue No. 98-5, this discount
was limited to the proceeds allocated to the Series C Preferred Stock and
was recognized immediately as a preferred stock dividend since the Series
C Preferred Stock was immediately convertible.
43
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(c) Deferred Stock-Based Compensation
The Company records deferred compensation when it makes restricted stock
awards or compensatory stock option grants to employees, consultants or
advisory board members. In the case of stock option grants to employees,
the amount of deferred compensation initially recorded is the difference,
if any, between the exercise price and quoted market value of the common
stock on the date of grant. Such deferred compensation is fixed and
remains unchanged for subsequent increases or decreases in the market
value of the Company's common stock. In the case of options granted to
consultants or advisory board members, the amount of deferred compensation
recorded is the fair value of the stock options on the grant date as
determined using a Black-Scholes valuation model. The Company records
deferred compensation as a reduction to stockholders' equity and an
offsetting increase to additional paid-in capital. The Company then
amortizes deferred compensation into stock-based compensation expense over
the performance period, which typically coincides with the vesting period
of the stock-based award of three to four years.
The components of deferred compensation are as follows:
Consultants
And Advisory
Employees Board Total
----------- ----------- -----------
Balance at December 31, 1999 $ 7,162,000 $20,180,172 $27,342,172
Deferred compensation recorded 20,325,684 4,195,356 24,521,040
Cancellations and fair value adjustments (9,223,100) (16,666,296) (25,889,396)
Amortization to stock-based compensation (7,584,654) (7,617,438) (15,202,092)
----------- ----------- -----------
Balance at December 31, 2000 10,679,930 91,794 10,771,724
Deferred compensation recorded
1,207 19,450 20,657
Cancellations and fair value adjustments (4,756,331) (109,623) (4,865,954)
Amortization to stock-based compensation (5,713,168) (1,621) (5,714,789)
----------- ----------- -----------
Balance at December 31, 2001 211,638 -- 211,638
Deferred compensation recorded -- 3,193 3,193
Amortization to stock-based compensation (95,232) (3,193) (98,425)
----------- ----------- -----------
Balance at December 31, 2002 $ 116,406 $ -- $ 116,406
=========== ============ ===========
For the year ended December 31, 2000, the Company also recorded
stock-based compensation of $709,375 relating to investment banking
services that were paid via the issuance of 25,000 shares of its common
stock, valued based on the closing stock market price of $28.38 on the
date of issuance.
Stock-based compensation is reflected in the accompanying consolidated
statements of operations as follows:
Years ended December 31,
------------------------------------
2002 2001 2000
---- ---- ----
Personnel costs $98,425 $2,394,106 $ 3,395,755
Loss from discontinued
operations -- 3,320,683 12,515,712
------- ---------- -----------
Total $98,425 $5,714,789 $15,911,467
======= ========== ===========
(13) Stock Options and Warrants
(a) Stock Options
The Amended and Restated Stonepath Group, Inc. 2000 Stock Incentive Plan,
(the "Stock Incentive Plan") covers 10,000,000 shares of common stock.
Under its terms, employees, officers and directors of the Company and its
subsidiaries are currently eligible to receive non-qualified and incentive
stock options and restricted stock awards. Options granted generally vest
over three to four years and expire ten years following the date of grant.
The Board of Directors or a committee thereof determines the exercise
price of options granted.
44
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
As part of a merger with Net Value, the Company converted the outstanding
options under the existing Net Value stock option plan into options to
purchase the Company's common stock using a conversion ratio of 0.4
Company options for every one Net Value option. On an "as-converted"
basis, Net Value had 490,900 options converted at the effective merger
date in November 2000.
The following summarizes the Company's stock option activity and related
information:
Weighted
Range of exercise average
Shares prices exercise price
------ ------ --------------
Outstanding at December 31, 1999 4,277,248 $1.00 - 10.13 $1.28
Granted 3,223,000 0.50 - 19.69 7.08
Net Value, Inc. options assumed 490,900 1.00 - 17.50 8.84
Cancelled (3,440,318) 1.00 - 16.38 4.16
----------
Outstanding at December 31, 2000 4,550,830 0.50 - 19.69 4.03
Granted 3,725,000 0.50 - 1.60 0.76
Cancelled (1,992,947) 0.50 - 19.69 5.99
-----------
Outstanding at December 31, 2001 6,282,883 0.50 - 17.50 1.47
Granted 3,648,000 1.30 - 2.30 1.37
Exercised (409,583) 0.50 - 1.00 0.96
Expired (74,000) 0.70 - 1.58 0.98
----------
Outstanding at December 31, 2002 9,447,300 $0.50 - 17.50 $1.46
==========
The following table summarizes information about options outstanding
and exercisable as of December 31, 2002:
Outstanding Options Exercisable Options
--------------------------------------------------- -----------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------------------------------------------------- ------------------ ------------- ---------------------
$0.50 - $1.00 5,107,500 6.8 years $ 0.82 4,588,187 $ 0.84
$1.21 - $2.00 3,661,200 9.3 years 1.34 157,394 1.64
$2.05 - $4.00 415,000 8.0 years 2.76 191,500 3.18
$6.38 - $10.00 74,000 1.2 years 9.51 72,750 9.56
$12.50 - $17.50 189,600 1.2 years 15.00 189,600 15.00
--------- ---------
Total 9,447,300 7.6 years $ 1.46 5,199,431 $ 1.59
========= =========
The weighted average fair value of employee options granted during 2002,
2001 and 2000 was $0.89, $0.53 and $6.58 per share, respectively. The fair
value of options granted were estimated on the date of grant using the
Black-Scholes option pricing model, with the following assumptions:
Assumption 2002 2001 2000
---------- ---- ---- ----
Dividend yield None None None
Expected volatility 93.8% 106.7% 134.6%
Average risk free interest rate 1.36% 3.99% 4.99%
Average expected lives 6.8 years 4.3 years 5.0 years
45
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
In December 2001, vesting was accelerated on options held by the Company's
former Chief Executive Officer. Since the acceleration of vesting occurred
pursuant to the terms of the original option agreement, no new measurement
date occurred and no additional expense was recorded in the accompanying
consolidated statement of operations.
On October 5, 2001, February 28, 2002 and July 3, 2002, the Company
modified the existing option arrangements with its Chief Executive Officer
such that, effective as of July 3, 2002, vesting was fully accelerated on
options to purchase 1,800,000 shares of the Company's common stock. Based
on the excess of the trading price of the common stock on the dates of the
modifications over the exercise price, the Company could incur a non-cash
charge to its earnings of approximately $870,000 if the Chief Executive
Officer leaves the employment of the Company prior to the vesting dates
specified in the original option grant.
(b) Warrants
The Company had outstanding the following warrants to purchase its
securities as of December 31, 2002:
Number of Exercise price
Description of series warrants issued per share
--------------------- --------------- --------------
Common stock 2,947,406 $1.00 - $26.58
========= ==============
These warrants were issued primarily in connection with (a) former
borrowing arrangements, (b) the Series C Preferred Stock issuance, (c) the
receipt of consulting services and (d) services to be rendered in
connection with a private placement of the Company's common stock.
Additionally, as part of a merger with Net Value in 2000, the Company
assumed the existing Net Value warrants totaling 675,089 on an
"as-converted" basis. The Company recorded interest expense on warrants
issued in connection with borrowing arrangements equal to the warrants'
then fair value as determined by independent valuations. The Company
allocated a portion of the net proceeds received from the Series C
Preferred Stock issuance to the cost of the Series C Warrants as
determined using the Black-Scholes valuation model. In 2000, the Company
recorded stock-based compensation of $2,799,028 on warrants issued to
consultants equal to the warrants' then fair value as determined using the
Black-Scholes valuation model. In 2002, the Company recorded $95,000 of
deferred offering costs for warrants that were issued in connection with
an anticipated private placement of the Company's common stock.
(14) Fair Value of Financial Instruments
At December 31, 2002 and 2001, the carrying values of cash and cash
equivalents, accounts receivable, loans receivable and accounts payable
approximated their fair values as they are short term and are generally
receivable or payable on demand.
(15) Related Party Transactions
Included in operating leases is certain real estate leased from the former
principal shareholder of Air Plus. The Company leased one building in 2002
and two buildings in 2001. Rent under this arrangement was determined by a
survey of comparable building rents and totaled $187,000 for the year
ended December 31, 2002 and $110,000 for the period from October 5, 2001
to December 31, 2001.
During 2002, the Company purchased certain computer equipment and
peripherals for $28,000 from a company owned by the Company's Chairman and
Chief Executive Officer.
During 2002, the Company paid a total of $60,000 to two of its directors
as a placement fee related to the employment of the Company's Chief
Financial Officer.
At December 31, 2002 and 2001, an officer was indebted to the Company for
a loan with an aggregate unamortized balance of $39,593 and $64,589,
respectively. This loan is generally forgivable over a three-year term and
for accounting purposes is amortized evenly to expense over the term which
ends in April 2004.
46
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
At December 31, 2002, a former principal shareholder of Global was
indebted to the Company for a loan amounting to $262,500. The loan is
repayable in three equal installments by offset against his portion of the
contingent consideration payment.
In March 2000, an officer contributed shares of an affiliated company to
the Company. The Company recorded the shares as contributed capital equal
to their estimated fair value of $853,319.
(16) Segment Information
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, established standards for reporting information about
operating segments in financial statements. Operating segments are defined
as components of an enterprise engaging in business activities about which
separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources
and in assessing performance. The Company determined that it had one
operating segment in 2001, Domestic Services, which provides a full range
of logistics and transportation services throughout North America. In
2002, with the acquisition of Global, the Company established its
International Services platform, which provides international air and
ocean logistics services. The Company identifies operating segments based
on the principal service provided by the business unit. Each segment has a
separate management structure. The accounting policies of the reportable
segments are the same as described in Note 3, Summary of Significant
Accounting Policies. Segment information, in which corporate expenses have
been fully allocated to the operating segments, is as follows (in
thousands):
Year ended December 31, 2002
--------------------------------------------------------------
Restated
Domestic International Restated
Services Services Corporate Total
-------- -------- --------- --------
Revenues from external customers $78,319 $44,469 $ -- $122,788
Intersegment revenues 76 15 -- 91
Revenues from significant customer 40,164 -- -- 40,164
Segment operating income 584 1,770 -- 2,354
Segment assets 41,863 13,867 (564) 55,166
Segment goodwill 15,103 5,208 -- 20,311
Depreciation and amortization 2,036 151 -- 2,187
Capital expenditures 788 349 676 1,813
Revenues, based on the location of the customer, are predominately
attributed to the United States in 2002 and 2001.
47
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(17) Quarterly Information (Unaudited)
The following is a summary of certain unaudited quarterly financial
information for fiscal 2002 and 2001:
Quarter ended
------------------------------------------------------------------------
Restated Restated Restated
2002 (1) March 31 June 30 September 30 December 31
-------- -------- ------- ------------ -----------
Revenues $ 13,065,560 $ 28,524,745 $ 37,881,049 $ 43,316,271
Cost of transportation 8,645,969 19,739,026 25,884,973 30,207,462
--------------- --------------- --------------- ---------------
Net revenues $ 4,419,591 $ 8,785,719 $ 11,996,076 $ 13,108,809
=============== =============== =============== ===============
Net income (loss) $ (1,226,954) $ 268,264 $ 1,991,482 $ 1,347,537
Preferred stock dividends and effect of
redemption (887,772) (892,116) 16,800,036 --
--------------- --------------- --------------- ---------------
Net income (loss) attributable to common
stockholders $ (2,114,726) $ (623,852) $ 18,791,518 $ 1,347,537
=============== =============== =============== ===============
Earnings (loss) per common share (2):
Basic $ (0.10) $ (0.03) $ 0.82 $ 0.06
=============== =============== =============== ===============
Diluted $ (0.10) $ (0.03) $ 0.07 $ 0.04
=============== =============== =============== ===============
Quarter ended
-----------------------------------------------------------------------
2001 (1) March 31 June 30 September 30 December 31
-------- -------- ------- ------------ -----------
Revenues $ -- $ -- $ -- $ 15,597,889
Cost of transportation -- -- -- 9,740,774
--------------- --------------- --------------- ---------------
Net revenues $ -- $ -- $ -- $ 5,857,115
=============== =============== =============== ===============
Income (loss) from continuing operations $ (1,241,281) $ (2,036,713) $ (677,031) $ 697,956
Loss from discontinued operations (7,483,862) (245,513) (1,845,232) (4,288,106)
--------------- --------------- --------------- ---------------
Net loss (8,725,143) (2,282,226) (2,522,263) (3,590,150)
Preferred stock dividends (1,428,038) (891,804) (918,660) (912,696)
--------------- --------------- --------------- ---------------
Net loss attributable to common stockholders $ (10,153,181) $ (3,174,030) $ (3,440,923) $ (4,502,846)
=============== =============== =============== ===============
Loss per share - basic and diluted:
Continuing operations (2) $ (0.13) $ (0.14) $ (0.08) $ (0.01)
Discontinued operations (0.37) ( 0.01) (0.09) (0.21)
--------------- --------------- --------------- ---------------
Net loss to common shareholders $ (0.50) $ (0.15) $ (0.17) $ (0.22)
=============== =============== =============== ===============
----------------
(1) Certain reclassifications have been made to conform to the 2002
annual presentation
(2) Includes effect of preferred stock dividends and effect of
redemption
(18) Subsequent Events
On March 10, 2003, the Company issued to its Chairman and Chief Executive
Officer options to purchase: 1) 300,000 shares of common stock at an
exercise price of $1.68 per share and 2) 400,000 shares of common stock at
an exercise price of $2.00 per share. The options to purchase 300,000
shares vest immediately and the balance vests annually over a three-year
period.
48
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
On March 6, 2003, the Company completed a private placement of 4,470,000
shares of its common stock. The transaction consisted of the sale of
4,270,00 shares at $1.35 per share and 200,000 shares at $1.54 per share.
In connection with this transaction, the Company realized gross proceeds
of $6,072,500, paid a brokerage fee consisting of cash commissions of
$364,350 and issued placement agent warrants to purchase 297,000 shares of
common stock at an exercise price of $1.49 per share. In addition, the
Company had previously paid the placement agent $25,000 in cash and had
issued them warrants to purchase 150,000 shares of common stock at an
exercise price of $1.23 per share. Also, in connection with this private
placement, the Company issued to its Chief Financial Officer options to
purchase 200,000 shares of common stock at an exercise price of $1.53 per
share. Options for 50,000 shares vest on July 3, 2003 and the balance
vests ratably thereafter over 36 months.
49
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
Independent Auditors' Report
The Board of Directors and Shareholders of
M.G.R., Inc. d/b/a Air Plus Limited, Distribution Services, Inc.,
and Contract Air, Inc.:
We have audited the accompanying combined statements of operations, changes in
shareholders' equity and comprehensive income, and cash flows of M.G.R., Inc.
d/b/a Air Plus Limited, Distribution Services, Inc., and Contract Air, Inc. (the
Companies) for the year ended December 31, 2000. These combined financial
statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these combined financial statements
based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the combined
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the combined financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
M.G.R., Inc. d/b/a Air Plus Limited, Distribution Services, Inc., and Contract
Air, Inc. for the year ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Minneapolis, Minnesota
September 24, 2001
50
M.G.R., Inc. d/b/a AIR PLUS LIMITED, DISTRIBUTION
SERVICES, INC., and CONTRACT AIR, INC.
Combined Statements of Operations
Year ended Six months ended June 20,
December 31, 2000 2001 2000
(unaudited) (unaudited)
Revenues $ 56,201,458 $ 26,014,801 $ 19,698,634
Operating expenses:
Purchased transportation (31,856,174) (15,678,882) (11,525,749)
Salaries, wages and benefits (11,805,734) (4,653,885) (3,268,444)
Depreciation and amortization (424,803) (240,787) (162,484)
Rent (2,097,615) (1,348,087) (961,851)
Other selling, general and
Administrative (6,216,391) (3,417,458) (2,134,739)
-------------- ------------ -------------
Total operating expenses (52,400,717) (25,339,099) (18,053,267)
-------------- ------------ -------------
Income from operations 3,800,741 675,702 1,645,367
Other income (expense)
Interest and dividend income 55,542 8,080 15,686
Interest expense (affiliate) (21,929) (31,848) (15,948)
Other net (44,465) -- 66,961
-------------- ------------ -------------
Total other income (expense) (10,852) (23,768) 66,699
-------------- ------------ -------------
Net earnings $ 3,789,889 $ 651,934 $ 1,712,066
=============== ============ =============
See accompanying notes to combined financial statements.
51
M.G.R., Inc. d/b/a AIR PLUS LIMITED, DISTRIBUTION
SERVICES, INC., and CONTRACT AIR, INC.
Combined Statements of Changes in Shareholders' Equity and Comprehensive Income
M.G.R., Inc., d/b/a Distribution
Air Plus Limited Services, Inc. Contract Air, Inc.
common stock common stock common stock
no par value no par value no par value
------------------- --------------------- -------------------
Retained
Shares Amount Shares Amount Shares Amount earnings
------ -------- ------ ------ ------ ------ ----------
Balances at December 31, 1999 17,700 $301,500 10,000 $1,000 17,700 $1,770 $3,118,019
Comprehensive income
Net earnings -- -- -- -- -- -- 3,789,889
Unrealized gain on marketable
securities -- -- -- -- -- -- --
Total comprehensive income
Distributions to shareholders -- -- -- -- -- -- (3,350,732)
------ -------- ------ ------ ------ ------ ----------
Balances at December 31, 2000 17,700 301,500 10,000 1,000 17,700 1,770 $3,557,176
Comprehensive income:
Net earnings -- -- -- -- -- -- 651,934
Unrealized loss on marketable
securities -- -- -- -- -- -- --
Total comprehensive income
Distributions to shareholders -- -- -- -- -- -- (624,417)
------ -------- ------ ------ ------ ------ ----------
Balances at June 30, 2001 (unaudited) 17,700 $301,500 10,000 $1,000 17,700 $1,770 $3,584,693
====== ======== ====== ====== ====== ====== ==========
Accumulated
other
comprehensive
income
(loss) Total
------------ -----------
Balances at December 31, 1999 $ 85,951 $ 3,508,240
Comprehensive income
Net earnings -- 3,789,889
Unrealized loss on marketable
securities (70,339) (70,339)
------------
Total comprehensive income 3,719,550
Distributions to shareholders -- (3,350,732)
----------- ------------
Balances at December 31, 2000 15,612 3,877,058
Comprehensive income:
Net earnings -- 651,934
Unrealized loss on marketable
securities (184,980) (184,980)
------------
Total comprehensive income 466,954
Distributions to shareholders -- (624,417)
----------- ------------
Balances at June 30, 2001 (unaudited) $ (169,368) $ 3,719,595
=========== ============
See accompanying notes to combined financial statements.
52
M.G.R., Inc. d/b/a AIR PLUS LIMITED, DISTRIBUTION
SERVICES, INC., and CONTRACT AIR, INC.
Combined Statements of Cash Flows
Year ended Six months ended June 30,
December 31, 2000 2001 2000
----------------- ------------ -------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net earnings $ 3,789,889 $ 651,934 $ 1,712,066
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 424,803 240,787 162,484
Bad debt provision 403,797 19,930 15,494
Loss (gain) on sale of marketable 44,465 -- (66,961)
securities
Changes in assets and liabilities
Accounts receivable (3,839,503) 3,097,052 2,073,523
Prepaid expenses (127,140) (102,043) (89,849)
Other assets (45,398) 7,695 266
Accounts payable 3,204,764 (3,211,203) (2,066,747)
Accrued expenses (25,282) 277,096 (194,691)
------------ ------------ -------------
Net cash provided by
operating activities 3,830,395 981,248 1,545,585
------------ ------------ -------------
Cash flows from investing activities:
Proceeds from sale of property and
equipment 21,434 -- --
Purchase of property and equipment (768,273) (164,512) (108,195)
Purchase of marketable securities (3,132) (253,275) --
Proceeds from sale of marketable
securities 146,445 25,000 103,320
------------ ------------ -------------
Net cash used in investing
activities (603,526) (392,787) (4,875)
------------ ------------ -------------
Cash flows from financing activities:
Short-term borrowings -- 250,000 --
Proceeds from notes to shareholders 452,773 -- --
Repayments of notes to shareholders -- (466,892) (260,965)
Distributions to shareholders (3,350,732) (624,417) (1,170,497)
------------ ------------ -------------
Net cash used in financing
activities (2,897,959) (841,309) (1,431,462)
------------ ------------ -------------
Net increase (decrease) in
cash and cash equivalents 328,910 (252,848) 109,248
Cash and cash equivalents at beginning of period 510,755 839,665 510,755
------------ ------------ -------------
Cash and cash equivalents at end of period $ 839,665 $ 586,817 $ 620,003
============ ============ =============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 21,929 $ 29,660 $ 15,948
============ ============ =============
See accompanying notes to combined financial statements.
53
M.G.R., Inc. d/b/a AIR PLUS LIMITED, DISTRIBUTION
SERVICES, INC., and CONTRACT AIR, INC.
Notes to Combined Financial Statements
(1) Nature of Operations and Basis of Presentation
M.G.R., Inc. d/b/a Air Plus Limited, Distribution Services, Inc., and
Contract Air, Inc. (the Companies) collectively constitute a national
logistics company specializing in providing air and ground time definite
freight distribution services to shippers and businesses. The Companies
(through Contact Air, Inc.) also provide transportation services for a
portion of the logistics business. The Companies are headquartered in
Minneapolis, Minnesota and maintain offices in 13 major metropolitan areas
in the United States and Puerto Rico. The three entities included in the
accompanying combined financial statements are related businesses under
common control and management. All significant intercompany accounts and
transactions have been eliminated in the combination.
(2) Summary of Significant Accounting Policies
(a) Cash and Cash Equivalents
The Companies consider all highly liquid instruments with a remaining
maturity of 90 days or less at the time of purchase to be cash
equivalents.
(b) Marketable Securities
Marketable securities are classified as available for sale and are
reported at fair value, based on quoted market prices, with the
unrealized gain or loss reported as a component of other comprehensive
income or loss in shareholders' equity.
(c) Property and Equipment
Depreciation is computed on a straight-line basis using a three-year
life for software, ten-year life for furniture and office equipment,
three-year life for vehicles, and the shorter of the lease term or
useful life for leasehold improvements. Expenditures for maintenance,
repairs, and renewals of minor items are charged to earnings as
incurred. Major renewals and improvements are capitalized.
(d) Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is
measured by comparison of the carrying amount of an asset to future net
undiscounted cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs
to sell.
(e) Income Taxes
The Companies have elected under Section 1362 of the Internal Revenue
Code and similar provisions of the State of Minnesota tax laws, to be
taxed as an S Corporation. Income or losses of the Companies are passed
directly in the Companies' shareholders; therefore, no provision is
reflected in these combined financial statements. On August 30, 2001,
the Companies entered into a definitive sale agreement with a publicly
held company (see note 6). As a result, the Companies' election to be
treated as an S corporation will be terminated, and the Companies will
account for income taxes pursuant to Financial Accounting Standards
Board (FASB) Statement No. 109, effective on the date the Companies are
sold.
(f) Revenue Recognition
Revenues related to shipments are recognized at the time the freight is
delivered. All other revenues, including storage, are recognized upon
performance.
(g) Major Customer and Concentration of Credit Risk
A single customer accounted for approximately 58%, 50% and 57% of
revenue in 2000 and the six months ended June 30, 2001 and 2000,
respectively.
54
M.G.R., Inc. d/b/a AIR PLUS LIMITED, DISTRIBUTION
SERVICES, INC., and CONTRACT AIR, INC.
Notes to Combined Financial Statements
(h) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect disclosures of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(i) Comprehensive Income
Comprehensive income is calculated in accordance with FASB Statement
No. 130, Reporting Comprehensive Income. Statement 130 requires that
unrealized gains and losses on the Companies' marketable securities be
included in accumulated other comprehensive income as a component of
shareholders' equity.
(j) Impact of Recently Issued Accounting Standards
FASB Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended by FASB Statement No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities (an
amendment of FASB Statement No. 133), is effective January 1, 2001. The
adoption of Statement 133 will not have a significant effect on the
Companies' results of operations.
(k) Interim Financial Information (unaudited)
Information presented for the six month periods ended June 30, 2001 and
2000 is unaudited. In the opinion of management, the unaudited financial
statements have been prepared on the same basis as the audited financial
statements, and reflect all adjustments necessary to present fairly the
result of operations and cash flows for the six month periods ended June
30, 2001 and 2000. The results of operations for these interim periods
are not necessarily indicative of results that may be expected for any
other interim period or for the year as a whole.
(3) Related Party Transactions
The Companies have entered into a series of notes payable with
shareholders. These notes bear interest at 8%, and are payable in equal
monthly installments of principal and interest. Interest under these notes
totaled $21,929, $29,660 and $15, 948 in 2000 and the six months ended June
30, 2001 and 2000, respectively.
Included in operating leases are two buildings leased from the Companies'
principal shareholder. Rent under these leases was determined by a survey
of comparable building rents and totaled $312,000 $156,000 and $156,000 in
2000 and the six months ended June 30, 2001 and 2000, respectively.
(4) Employee Benefit Plan
The Companies have an employee savings plan (the Plan) for eligible
employees under Section 401(k) of the Internal Revenue Code. The Plan
allows employees to defer up to 6% of their compensation on a pretax basis.
The Companies may, at their discretion, match a portion of the employee
deferrals. In 2000 and the six months ended June 30, 2001 and 2000, the
Companies' contributions under the Plan were $233,820, $0 and $0,
respectively.
(5) Commitments and Contingencies
(a) Leases
The Companies occupy office and warehouse facilities under terms of
operating leases expiring through 2006. Future minimum annual lease
payments under noncancelable leases in excess of one year are as
follows:
55
M.G.R., Inc. d/b/a AIR PLUS LIMITED, DISTRIBUTION
SERVICES, INC., and CONTRACT AIR, INC.
Notes to Combined Financial Statements
Year ending Third Related
December 31, Party party
------------ ---------- ---------
2001 $1,614,895 312,000
2002 1,432,104 312,000
2003 894,183 256,000
2004 789,353 144,000
2005 784,101 72,000
Thereafter 267,926 --
---------- ---------
$5,782,562 1,096,000
========== =========
(b) Litigation
The Companies are involved in claims and lawsuits which arise in the
normal course of business, none of which currently, in management's
opinion, will have a significant effect on the Companies' financial
statements.
(6) Subsequent Event
On August 30, 2001, the Companies entered into a definitive agreement for
sale of the Companies to Stonepath Group, Inc., a publicly traded
corporation, for $34.5 million consisting of cash of $17.5 million at
closing and a four-year earn-out arrangement based upon the future
financial performance of the Companies. The acquisition is subject to
customary closing conditions, including the completion of audited financial
statements and the receipt of a fairness opinion.
56
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
STONEPATH GROUP, INC.
Column C - Additions
--------------------
(2)
Column B - (1) Charged
Balance at Charged to to other Column D Column E -
Column A - beginning of costs and accounts- Deductions- Balance at
Description period expenses describe describe end of period
----------- ------------ ---------- ---------- ------------ -------------
Allowance for doubtful accounts:
Year ended December 31, 2002 $167,000 $153,000 $ -- $ -- $320,000
======== ======== ======= ======= ========
Year ended December 31, 2001 $ -- $167,000 $ -- $ -- $167,000
======== ======== ======= ======= ========
Year ended December 31, 2000 $ -- $ -- $ -- $ -- $ --
======== ======== ======= ======= ========
57
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this Amendment No. 2 to its Annual
Report on Form 10-K/A to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Philadelphia, Commonwealth of Pennsylvania, on
January 16, 2004.
STONEPATH GROUP, INC.
BY: /s/ Dennis L. Pelino
------------------------
Dennis L. Pelino, (Chairman of the Board of
Directors and Chief Executive Officer)
BY: /s/ Bohn H. Crain
---------------------
Bohn H. Crain (Chief Financial Officer)
BY: /s/ Thomas L. Scully
------------------------
Thomas L. Scully (Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Annual Report on Form 10-K/A has been signed by the following
persons in the capacities indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Dennis L. Pelino Chairman of the Board of Directors and
-------------------- Chief Executive Officer January 16, 2004
Dennis L. Pelino
/s/ J. Douglass Coates Director January 16, 2004
----------------------
Douglass Coates
/s/John Springer Director January 16, 2004
----------------
John Springer
/s/ David R. Jones Director January 16, 2004
------------------
David R. Jones
/s/ Aloysius T. Lawn, IV Director January 16, 2004
------------------------
Aloysius T. Lawn, IV
/s/ Robert McCord Director January 16, 2004
-----------------
Robert McCord
58
Exhibit Index
Exhibit Index
Exhibit Number Description
-------------- -----------
23.1 Independent Auditors' Consent
23.2 Independent Auditors' Consent
31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. (This exhibit shall not
be deemed "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, or otherwise subject to the
liability of that section. Further, this exhibit shall not be
deemed to be incorporated by reference into any filing under
the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended.)
32.2 Certification of Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. (This exhibit shall not
be deemed "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, or otherwise subject to the
liability of that section. Further, this exhibit shall not be
deemed to be incorporated by reference into any filing under
the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended.)
59