================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
Commission File Number: 001-16105
STONEPATH GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 65-0867684
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1600 MARKET STREET, SUITE 1515, PHILADELPHIA, PA 19103
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 979-8370
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 American Stock Exchange
$.001 per share
Securities registered pursuant to Section 12(g) of the Act:
NONE
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. [X]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act)
YES [X] NO [ ]
The aggregate market value of the Registrant's common stock held by
non-affiliates of the Registrant as of June 30, 2003 was $77,150,684 based upon
the closing sale price of the Registrant's common stock on the American Stock
Exchange of $2.72 on such date. See Footnote (1) below.
The number of shares outstanding of the Registrant's common stock as of
March 1, 2004 was 39,004,242.
Documents Incorporated by Reference: None
Index to Exhibits appears at page 55 of this Report
----------
(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.
================================================================================
STONEPATH GROUP, INC.
ANNUAL REPORT ON FORM 10-K/A
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2003
TABLE OF CONTENTS
PART I
Item 1. Business 1
Item 2. Properties 18
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 19
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities 19
Item 6. Selected Financial Data 21
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 40
Item 8. Financial Statements and Supplementary Data 40
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 40
Item 9A. Controls and Procedures 40
PART III
Item 10. Directors and Executive Officers of the Registrant 42
Item 11. Executive Compensation 44
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters 50
Item 13. Certain Relationships and Related Transactions 52
Item 14. Principal Accountant Fees and Services 54
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 55
SIGNATURES 96
i
EXPLANATORY NOTE
This Form 10-K/A is being filed to restate the consolidated financial
statements of the Company as of December 31, 2003 and 2002 and for each of the
years in the three-year period ended December 31, 2003 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 "Risks Particular to Our Business" and "Legal Proceedings" under Items 1
and 3 of Part I and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" under Item 7 of Part II. The restatement of our
consolidated financial statements primarily related to correcting the accrual
for purchased transportation, certain revenue transactions and the resultant
income tax effects. In addition, the amounts owed as of December 31, 2003 and
2002 under various earn-out provisions have been changed to reflect the impact
of the restatement. A description of the restatement can be found in Note 3 to
our consolidated financial statements. Except as otherwise specifically noted,
all information contained herein is as of December 31, 2003 and does not reflect
any events or changes in information that may have occurred subsequent to that
date.
PART I
This Annual Report on Form 10-K/A includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. We have based
these forward-looking statements on our current expectations and projections
about future events. These forward-looking statements are subject to known and
unknown risks, uncertainties and assumptions about us and our subsidiaries that
may cause our actual results, levels of activity, performance or achievements to
be materially different from any future results, levels of activity, performance
or achievements expressed or implied by such forward-looking statements. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "could," "would," "expect," "plan," "anticipate," "believe,"
"estimate," "continue" or the negative of such terms or other similar
expressions. Factors that might cause or contribute to such a material
difference include, but are not limited to, those discussed elsewhere in this
Annual Report, including the section entitled "Risks Particular to Our Business"
and the risks discussed in our other Securities and Exchange Commission filings.
The following discussion should be read in conjunction with our audited
Consolidated Financial Statements and related Notes thereto included elsewhere
in this report.
ITEM 1. BUSINESS
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 which manages and arranges 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 also
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 services, we
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 21 major metropolitan areas in North America, Puerto
Rico and ten locations in Asia, as well as an extensive network of independent
carriers and service partners strategically located throughout the world.
Our objective is to build a leading global logistics services
organization that integrates established logistics companies with innovative
technologies. To that end, we are extending our network through a combination of
synergistic acquisitions and the organic expansion of our existing operations.
1
Our acquisition strategy focuses on acquiring and integrating logistics
businesses that will enhance operations within our current market areas as well
as extend our network to targeted locations in Asia, South America and Europe.
We select acquisition targets based upon their ability to demonstrate: (1)
historic levels of profitability; (2) a proven record of delivering superior
time-definite distribution and other value added services; (3) an established
customer base of large and mid-sized companies; and (4) opportunities for
significant growth within strategic segments of our business.
As we integrate these companies, we intend to create additional
stockholder value by: (1) improving productivity by adopting enhanced
technologies and business processes; (2) improving transportation margins by
leveraging our growing purchasing power; and (3) enhancing the opportunity for
organic growth by cross-selling and offering expanded services.
Our strategy is designed to take advantage of shifting market dynamics.
The third-party logistics industry continues to grow as an increasing number of
businesses outsource their logistics functions to more cost effectively manage
and extract value from their supply chains. Also, we believe the industry is
positioned for further consolidation since it remains highly fragmented, and
since customers are demanding the types of sophisticated and broad reaching
services that can more effectively be handled by larger and more diverse
organizations.
Through March 1, 2004, we have completed the acquisition of 16 logistics
companies. The initial phase of our acquisition strategy was to develop a
U.S.-based platform of service offerings. We accomplished this through the
acquisition of M.G.R., Inc. (d/b/a "Air Plus") on October 5, 2001 and Global
Transportation Services, Inc. ("Global") on April 4, 2002. Founded in 1990, Air
Plus is a leading time-definite logistics company providing a full range of
domestic transportation and distribution solutions including warehousing and
order fulfillment. Air Plus services a customer base of manufacturers,
distributors and national retail chains through its network of offices in North
America and an extensive network of over 200 agents. Founded in 1985, Global
provides a full range of international transportation and logistics solutions to
a customer base of manufacturers and national retail chains. Global also
provides customs brokerage, ocean forwarding, NVOCC services, consolidation and
deconsolidation services, air import and export services and warehousing and
distribution services.
The next phase of our acquisition strategy was to supplement the organic
growth of our organization through targeted "add-on" acquisitions that were
intended to fill a strategic industry niche and offer complementary services to
our existing customer base. We accomplished this by acquiring United American
Freight Services, Inc. ("United American") on May 30, 2002, Transport
Specialists, Inc. ("TSI") on October 1, 2002, Transportation Rail Warehousing
Logistics, Inc. ("TRWL") on January 31, 2003, Regroup Express LLC ("Regroup") on
June 20, 2003 and Customs Services International, Inc. ("CSI") on July 16, 2003.
United American, based in the Detroit, Michigan area, provides us with a
division that supports the automotive industry, while both TSI and Regroup,
based in Northern Virginia, and TRWL, based in Portland, Maine, service
government agencies and the defense sector. CSI provides a full range of
international freight forwarding and customs brokerage services out of its
offices in Miami, Florida and El Paso, Texas, with a focus on Latin America,
Europe and Asia.
Most recently, we completed a series of acquisitions that increased our
presence in Asia with the goal of building Stonepath into a leading worldwide
integrated logistics service organization. On August 8, 2003, we acquired a
controlling interest in the Singapore and Cambodia based operations of the
G-Link Group of companies, a regional logistics business headquartered in
Singapore, with offices throughout Southeast Asia. We then acquired three
Malaysian based offices of G-Link in December 2003. During December 2003, we
also acquired controlling interests in East Ocean Logistics Ltd., a Hong Kong
based company that specializes in international ocean freight services, Planet
Logistics Pte. Ltd., a Singapore based company that focuses on international and
intra-Asia air cargo services, and Group Logistics Pte. Ltd., a start-up
providing air cargo services in Shanghai, PRC. On February 9, 2004, we increased
our presence in Shanghai by acquiring a majority interest in Shaanxi Sunshine
Cargo Services International Company, Ltd. ("Shaanxi"), a Class A licensed
freight forwarder headquartered in Shanghai that has been operated by founder
and President Andy Tsai since 1993. Shaanxi provides a wide range of customized
transportation and logistics services and supply chain solutions, including
global freight forwarding, warehousing and distribution services, shipping
services and special freight handling.
We have identified a number of additional companies that may be suitable
acquisition candidates and we are in preliminary discussions with a select
number of them.
2
There are a variety of risks associated with our ability to achieve our
strategic objectives, including our ability to acquire and profitably manage
additional businesses, our current reliance on a small number of key customers,
the risks inherent in international operations, and the intense competition in
our industry for customers and for the acquisition of additional businesses. For
a more detailed discussion of these risks, see the section of this Item 1
entitled "Risks Particular to our Business."
INDUSTRY OVERVIEW
As business requirements for efficient and cost-effective distribution
services have increased, so has the importance and complexity of effectively
managing freight transportation. Businesses increasingly strive to minimize
inventory levels, reduce order and cash-to-cash cycle lengths, perform
manufacturing and assembly operations in lowest cost locations and distribute
their products throughout global markets, often requiring expedited or
time-definite shipment services. Furthermore, customers increasingly cite an
efficient supply chain as a critical element in improving their financial
performance. To remain competitive, successful companies need to not only
achieve success in their core businesses, they must execute quickly and
accurately.
To accomplish their goals, many businesses turn to organizations
providing a broad array of supply chain services. These service providers
consist of freight forwarders, customs brokers, warehouse operators and other
value added logistics service providers. We believe that these service providers
must possess state-of-the-art technology and the ability to provide global
supply chain management services to be responsive to the marketplace. Many
logistics providers are now providing their customers with customized solutions
for the planning and management of complex supply chains. The demand for these
solutions has risen as companies continue to outsource non-core competencies,
globally source goods and materials and focus on managing the overall cost of
their supply chain. These trends are further facilitated by the rapid growth of
technology including the growth of Web-based track and trace technology, and the
ability to create electronic interfaces between the systems of service providers
and their customers.
We believe we can differentiate ourselves by focusing on time-definite
supply chain solutions with capabilities across virtually every mode of
transportation, as well as combining these services with other value-added
logistics services, including pick-and-pack services, merge-in-transit,
inventory management, Web-based order management, warehousing, reverse
logistics, dedicated trucking and regional and local distribution. We also
believe that we have a competitive advantage resulting from our extensive
knowledge of logistics markets, information systems, the experience of our
logistics managers and the market information we possess from our diverse
customer base.
Market penetration of third-party logistics providers ("3PLs") is still
relatively low. According to industry sources, total gross expenditures managed
by third-party logistics services in the United States was approximately $65
billion in 2002, representing about 7% of the $910 billion in estimated domestic
business logistics systems costs. For 2002, domestic non-asset based
transportation management was estimated to have grown $19.5 billion, or 11.4% as
compared to 2001.
Barring the risk of international crisis and armed conflicts, we believe
that the third-party logistics industry in general, and that time-definite
distribution in particular, is poised for continued growth. The growth in the
use of third-party logistics services is being driven by a number of factors,
including:
o Outsourcing of Non-Core Activities. Companies are increasingly
outsourcing freight forwarding, warehousing and other supply chain
activities to allow them to focus on their core competencies. From
managing purchase orders to the timely delivery of products,
companies turn to 3PLs to manage these functions at a lower cost and
more efficiently.
o Globalization of Trade. As barriers to international trade are
reduced or eliminated, companies are increasingly sourcing their
parts, supplies and raw materials from the most cost competitive
suppliers throughout the world. This places a greater emphasis on
international freight management and just-in-time delivery.
Outsourcing of manufacturing functions to, or locating company-owned
manufacturing facilities in, low cost areas of the world also
results in increased volumes of world trade.
o Increased Need for Time-Definite Delivery. The need for just-in-time
and other time-definite delivery has
3
increased as a result of the globalization of manufacturing, greater
implementation of demand-driven supply chains, the shortening of
product cycles and the increasing value of individual shipments.
Many businesses recognize that increased spending on time-definite
supply chain management services can decrease overall manufacturing
and distribution costs, reduce capital requirements and allow them
to manage their working capital more efficiently by reducing
inventory levels and inventory loss.
o Consolidation of Logistics Function. As companies try to develop
"partnering" relationships with fewer suppliers, they are
consolidating the number of freight forwarders and supply chain
management providers they use. This trend places greater pressure on
regional or local freight forwarders and supply chain management
providers to grow or become aligned with a global network. Larger
freight forwarders and supply chain management providers benefit
from economies of scale which enable them to negotiate reduced
transportation rates with the carriers actually providing the
transportation services and to allocate their overhead over a larger
volume of transactions. Globally-integrated freight forwarders and
supply chain management providers are better situated to provide a
full complement of services, including pick-up and delivery,
shipment via air, sea and/or ground transport, warehousing and
distribution, and customs brokerage.
o Increased Significance of Technology. Advances in technology are
placing a premium on decreased transaction times and increased
business-to-business activity. Companies have recognized the
benefits of being able to transact business electronically.
Accordingly, businesses increasingly are seeking the assistance of
supply chain service providers with sophisticated information
technology systems which facilitate real-time transaction processing
and Web-based shipment monitoring.
According to a survey led by Dr. C. John Langley, Georgia Institute of
Technology, third-party logistics use among North American companies remained
strong in 2003, with 78% of North American companies reporting that they
outsource a portion of their logistics needs to logistics service providers or
3PLs. Among companies surveyed in Western Europe, 79% of respondents indicated
they use 3PL services, and in the Asia-Pacific region, more than half (58%)
currently outsource.
We expect the strategic role of information technology and the demand
for real-time information such as inventory visibility and order status updates
to have a positive impact on our business. The 2003 Langley survey supports our
contention that IT-based services and capabilities are among the key
expectations with customers of logistics service providers. The top five
outsourced logistics services and IT support functions were:
warehouse/distribution center management (77%); Web-enabled communications
(64%); transportation management (64%); shipment tracking/event management
(62%); and export/import/freight-forwarding/customs clearance (61%).
The growing emphasis on just-in-time inventory control processes has
added to the complexity and need for time-definite and other value added
supply-chain services. We believe that we can continue to differentiate
ourselves by combining our time-definite transportation solutions with other
complementary supply chain solutions. We expect to benefit from the intense
corporate focus on lower-cost services, which will positively impact those
providers who have the ability to leverage relationships with numerous carriers
and shippers. We also believe that we are well positioned to take advantage of
the growing trend toward international freight services and time-definite
domestic ground services, both of which have increased in demand during the most
recent economic cycle.
OUR STRATEGIC OBJECTIVES
Our Business Strategy
Our objective is to provide customers with comprehensive value-added
logistics solutions on a global scale. We plan to achieve this goal through a
combination of growth through acquisition and continued organic growth. We
intend to carry out the following strategies:
o Enter New and Expand Existing Markets through Acquisitions. We are
pursuing an aggressive acquisition strategy to enhance our position
in our current markets and to acquire operations in new markets. We
anticipate expanding into new and existing markets by acquiring
well-established logistics organizations that are leaders in their
regional markets. In particular, we intend to focus our acquisition
strategy on candidates
4
that have historic levels of profitability, a proven record of
delivering superior time-definite distribution and other value added
services, an established customer base of large and mid-sized
companies and opportunities for significant growth within strategic
segments of our business.
o Continue Organic Growth. A key component of our strategy is to
continue the organic growth of our existing business as well as the
business of the companies we acquire. We expect that we can continue
to fuel internal growth by cross-selling our domestic and
international capabilities to our existing customer base and
deploying supply chain technologies that will drive new customer
acquisitions.
o Development of Identity. We are also developing the "Stonepath
Logistics" brand and intend to leverage our broader set of
capabilities with the goal of capturing business opportunities which
would not normally be available to a regionally-oriented logistics
company.
Our Acquisition Strategy
We believe there are many attractive acquisition candidates in our
industry because of the highly fragmented composition of the marketplace, the
industry participants' need for capital and their owners' desire for liquidity.
We will continue to expand our Domestic and International Services
platforms in the United States through a number of "add-on" acquisitions of
other companies with complementary geographical and logistics service offerings.
These "add-on" acquisitions are generally expected to have pre-tax operating
earnings of $1.0 million to $3.0 million. Companies in this range of earnings
may be receptive to our acquisition program since they are often too small to be
identified as acquisition targets by larger public companies or to independently
attempt their own public offerings. In addition, we will continue to pursue
"platform" acquisitions to expand in targeted markets in Asia, South America and
Europe which will further enable our global supply-chain execution capabilities
and improve our overall profitability. We believe that our combined domestic and
international capabilities will provide a significant competitive advantage in
the marketplace.
A "platform" acquisition is defined by us as one that creates a
significant new capability for the Company, or entry into a new global
geography. When completing a platform acquisition, we would expect to retain the
management as well as the operating, sales and technical personnel of the
acquired company to maintain continuity of operations and customer service. The
objective would be to increase an acquired company's revenue and improve its
profitability by implementing our operating strategies for internal growth.
An "add-on" acquisition, on the other hand, will more likely be regional
in nature, will be smaller than a platform acquisition and will enable us to
offer additional services or expand into new regional markets, or serve new
industries. When justified by the size and service offerings of an add-on
acquisition, we expect to retain the management, along with the operating, sales
and technical personnel of the acquired company, while seeking to improve that
company's profitability by implementing our operating strategies. In most
instances where there is overlap of geographic coverage, operations acquired by
add-on acquisitions can be integrated into our existing operations in that
market, resulting in the elimination of duplicative overhead and operating
costs.
We believe we can successfully implement our acquisition strategy due
to: (i) the highly fragmented composition of the market; (ii) our strategy for
creating an organization with global reach, which should enhance an acquired
company's ability to compete in its local and regional market through an
expansion of offered services and lower operating costs; (iii) the potential for
increased profitability as a result of our centralization of certain
administrative functions, greater purchasing power, and economies of scale; (iv)
our standing as a public corporation; (v) a decentralized management strategy,
which should, in most cases, enable the acquired company's management to remain
involved in the operation of the Company; and (vi) the ability of our
experienced management to identify acquisition opportunities.
Our Operating Strategy
o Foster a Decentralized Entrepreneurial Environment. A key element of
our operating strategy is to foster a decentralized, entrepreneurial
environment for our employees. We intend to foster this environment
by continuing to build on the names, reputations and customer
relationships of acquired companies and by
5
sharing their operating policies, procedures and expertise across
the organization to develop new ideas to best serve the existing and
prospective customers of the Company. An entrepreneurial business
atmosphere is likely to allow our regional offices to quickly and
creatively respond to local market demands and enhance our ability
to motivate, attract and retain managers to maximize growth and
profitability.
o Develop and Maintain Strong Customer Relationships. We seek to
develop and maintain strong, interactive customer relationships by
anticipating and focusing on our customers' needs. We emphasize a
relationship-oriented approach to business, rather than the
transaction or assignment-oriented approach used by many of our
competitors. To develop close customer relationships, we regularly
meet with both existing and prospective customers to help design
solutions for, and identify the resources needed to execute, their
supply chain strategies. We believe that this relationship-oriented
approach results in greater customer satisfaction and reduced
business development expense.
o Centralize Administrative Functions. We seek to maximize our
operational efficiencies by integrating general and administrative
functions at the corporate level, and reducing or eliminating
redundant functions and facilities at acquired companies. This
enables us to quickly realize potential savings and synergies,
efficiently control and monitor our operations and allows acquired
companies to focus on growing their sales and operations.
OPERATIONS
Our primary business operations involve obtaining shipment or material
orders from customers, creating and delivering a wide range of logistics
solutions to meet customers' specific requirements for transportation and
related services, and arranging and monitoring all aspects of material flow
activity utilizing advanced information technology systems. These logistics
solutions include domestic and international freight forwarding, customs
brokerage and door-to-door delivery services using a wide range of
transportation modes, including air, ocean and truck as well as customs
brokerage, warehousing and other value-added services, such as inventory
management, assembly, distribution and installation for manufacturers and
retailers of commercial and consumer products.
As a non-asset-based logistics provider, we arrange for and subcontract
services on a non-committed basis to airlines, motor carriers, express
companies, steamship lines and warehousing and distribution operators. By
concentrating on network-based solutions, we avoid competition with logistics
providers that offer dedicated outsourcing solutions for single elements of the
supply chain. Such dedicated logistics companies typically provide expensive,
customized infrastructure and systems for a customer's specific application and,
as a result, dedicated solutions that are generally asset-intensive, inflexible
and invariably localized to address only one or two steps in the supply chain.
Our network-based services leverage common infrastructure and technology systems
so that solutions are scalable, replicable and require a minimum amount of
customization (typically only at the interface with the customer). This
non-asset ownership approach maximizes our flexibility in creating and
delivering a wide range of end-to-end logistics solutions on a global basis
while simultaneously allowing us to exercise significant control over the
quality and cost of the transportation services provided.
Within the logistics industry, we target specific markets in which we
believe we can achieve a competitive advantage. For example, in the freight
forwarding market, we arrange for the transportation of cargo that is generally
larger and more complex than shipments handled by integrated carriers such as
United Parcel Service and Federal Express Corporation. In addition, we provide
specialized combinations of services that traditional freight forwarders cannot
cost-effectively provide, including time-definite delivery requirements,
direct-to-store distribution and merge-in-transit movement of products from
various vendors in a single coordinated delivery to, and/or installation at, the
end-user.
Our services are broadly classified into the following categories:
o Freight Forwarding Services. We offer domestic and international
air, ocean and ground freight forwarding for shipments that are
generally larger than shipments handled by integrated carriers of
primarily small parcels such as Federal Express Corporation and
United Parcel Service. Our basic freight forwarding business is
complemented by customized and information technology-based options
to meet customers' specific needs. Our Domestic Services
organization offers same day, one, two and three to five day service
along with expedited ground service within North America and Puerto
Rico through our network of asset
6
based carriers. On a limited basis, we also provide motor carrier
services through one of our own affiliates.
o Customs Brokerage Services. Our International Services organization
provides customs brokerage services. Within each country, the rules
and regulations vary along with the level of expertise that is
required to perform the customs brokerage services. Our customs
brokers and support staff have substantial knowledge of the complex
tariff laws and customs regulations governing the payment of duty,
as well as valuation and import restrictions in their respective
countries.
o Warehousing and Other Value Added Services. Our warehousing services
primarily relate to storing goods and materials to meet our
customers' production or distribution schedules. Other value added
services include receiving, deconsolidation and decontainerization,
sorting, put away, consolidation, assembly, inspection services,
cargo loading and unloading, assembly of freight, customer inventory
management and protective packing and storage. We receive storage
charges for use of our warehouses and fees for our other services.
o Time Definite Transportation. We specialize in complex,
time-definite delivery of product to North American destinations.
These include high-volume, complex multi-destination consolidation
programs for catalog, retail and other shippers. We have special
programs focused on high value and breakable freight in all modes of
transportation.
Other value added services provided by us include:
o Direct to store logistics for retail customers involving
coordination of product received directly from manufacturers and
dividing large shipments from manufacturers into numerous smaller
shipments for delivery directly to retail outlets or distribution
centers to meet time-definite product launch dates.
o Turn-key product management services for retailers - including
comprehensive vendor compliance management, central delivery and
distribution centers close to consumption, inventory forecasting,
replenishment and management - all on the Web.
o Merge-in-transit logistics involving movement of products from
various vendors at multiple locations to a Company facility and the
subsequent merger of the various deliveries into a single
coordinated delivery to the final destination. Such services are
useful to retailers where deliveries from diverse sources are
organized and distributed to maximize efficiency of their sales and
marketing programs.
o Web-based fulfillment solutions providing order management as well
as the subsequent pick, pack and shipment for our customers.
o Turn-key supply chain and logistics outsourcing projects where we
operate one or more warehouses or the entire end-to-end supply
chain. We provide sophisticated systems that supply global location,
status and ownership of parts/SKUs and enable the timely cross
border customs clearance and placement desired by the final consumer
of the goods.
o Value-added, high-speed, time-definite, total-destination programs
that include packaging, transportation, unpacking and placement of
new products and equipment.
o Packaging, transportation, unpacking and stand installation for
domestic trade shows and major expositions.
o Reverse logistics involving the return of products from end users to
manufacturers, retailers, resellers or remanufacturers, including
verification of working order, defect analysis, serial number
tracking and inventory management.
7
INFORMATION SYSTEMS
A key component of our growth strategy is the regular enhancement of our
information systems and ultimate migration of the information systems of our
acquired companies to a common set of back-office and customer facing
applications. We believe that the ability to provide accurate, real-time
information on the status of shipments and the status, ownership and details of
the accompanying inventory is paramount to our customers. We believe that our
efforts in this area will provide competitive service advantages, new customers
and an increase of business from existing accounts. In addition, we believe that
centralizing our back-office operations and using our transportation management
system to automate the rating, routing, tender and financial settlement
processes for transportation movements will drive significant productivity
improvement across our network.
To execute this strategy, we have and will continue to assess
technologies obtained through our acquisition strategy in combination with
commercially available supply chain technologies to launch our own
"best-of-breed" solution set using a combination of owned and licensed
technologies. We refer to this technology set as Tech-Logis(TM) (or Technology
in Logistics). We are using Tech-Logis(TM) to provide: (1) a customer-facing
portal that unifies the look and feel of how customers, employees and suppliers
work with and connect to us; (2) a robust supply chain operating system
including order, inventory optimization, transportation, warehouse and supply
chain event management for use across the organization; and (3) a common data
repository for analysis and reporting to provide advanced metrics to management
and our customers. We expect to finish the delivery of the Tech-Logis(TM)
platform in 2004 and to provide subsequent upgrades and new service areas over
time.
In executing this strategy, we have and will continue to invest
significant management and financial resources to deliver these technologies. We
believe these technologies will provide financial and competitive advantages in
the years ahead and will increase our competitive differentiation.
SALES AND MARKETING
We market services on a global basis using our senior management, sales
executives, regional managers, terminal managers and our national service
centers located strategically across the United States and in select
international locations.
We seek to create long-term relationships with our customers and to
increase the quantity of business from each customer over time. Additionally, we
have increased our emphasis on obtaining high-revenue national accounts with
multiple shipping locations. These accounts typically impose numerous
requirements on those competing for their freight business, including electronic
data interchange and proof of delivery capabilities, the ability to generate
customized shipping reports and a nationwide network of terminals. These
requirements often limit the competition for these accounts to a very small
number of logistics providers, enabling us to more effectively compete for these
accounts.
Our customers include large manufacturers and distributors of computers
and other electronic and high-technology equipment, printed and publishing
materials, automotive and aerospace components, trade show exhibit materials,
telecommunications equipment, machinery and machine parts, apparel,
entertainment products, and household goods. For the year ended December 31,
2003, our largest customer, Best Buy Co., Inc., accounted for approximately 24%
of our revenue, down from 33% in 2002. Approximately 22% of our 2003 revenue was
derived from our next five largest customers, none of which accounted for 10% or
more of our 2003 revenue. As our current companies continue to diversify, and as
we continue our acquisition strategy, our exposure to customer and industry
concentrations should be significantly reduced.
We have begun to place an increased emphasis on the development of a
global brand platform. Over the course of 2003, we began operating all of our
businesses under the single global brand "Stonepath Logistics," which we believe
will help us reach our organic expansion goals.
8
COMPETITION AND BUSINESS CONDITIONS
Our business is directly impacted by the volume of domestic and
international trade. The volume of this trade is influenced by many factors,
including economic and political conditions in the United States and abroad,
major work stoppages, exchange controls, currency fluctuations, acts of war,
terrorism and other armed conflicts, and United States and international laws
relating to tariffs, trade restrictions, foreign investments and taxation.
The global logistics services and transportation industries are
intensively competitive and are expected to remain so for the foreseeable
future. We compete against other integrated logistics companies, as well as
transportation services companies, consultants, information technology vendors
and shippers' transportation departments. This competition is based primarily on
rates, quality of service (such as damage-free shipments, on-time delivery and
consistent transit times), reliable pickup and delivery and scope of operations.
As a provider of third-party logistics services, we encounter
competition from a large number of firms, much of it coming from local or
regional firms which have only one or a small number of offices and do not offer
the breadth of services and integrated approach as we offer. However, some of
this competition comes from major United States and foreign-owned firms which
have networks of offices and offer a wide variety of services. We believe that
quality of service, including information systems capability, global network
capacity, reliability, responsiveness, expertise and convenience, scope of
operations, customized program design and implementation and price are important
competitive factors in our industry.
Competition within the domestic freight forwarding industry is also
intense. Although the industry is highly fragmented with a large number of
participants, we compete most often with a relatively small number of freight
forwarders with nationwide networks and the capability to provide the breadth of
services offered by us. We also encounter competition from passenger and cargo
air carriers, trucking companies and others. As we expand our international
operations, we expect to encounter increased competition from those freight
forwarders that have a predominantly international focus, including DHL Danzas
Air and Ocean, Expeditors International of Washington, Inc., UPS Supply Chain
Solutions (a unit of United Parcel Service) and Eagle Logistics, Inc. Many of
our competitors have substantially greater financial resources than we do.
We also encounter competition from regional and local air freight
forwarders, cargo sales agents and brokers, surface freight forwarders and
carriers and associations of shippers organized for the purpose of consolidating
their members' shipments to obtain lower freight rates from carriers. As an
ocean freight forwarder, we will encounter strong competition in every country
in which we choose to operate. This includes competition from steamship
companies and both large forwarders with multiple offices and local and regional
forwarders with one or a small number of offices. Quality of service, including
reliability, responsiveness, expertise and convenience, scope of operations,
information technology and price are the most important competitive factors in
our industry.
REGULATION
We do not believe that transportation related regulatory compliance has
had a material adverse impact on operations to date. However, failure to comply
with the applicable regulations or to maintain required permits or licenses
could result in substantial fines or revocation of our operating permits or
authorities. We cannot give assurance as to the degree or cost of future
regulations on our business. Some of the regulations affecting our operations
are described below.
Our air freight forwarding business is subject to regulation, as an
indirect air cargo carrier, under the U.S. Department of Transportation's
Transportation Security Administration. The airfreight forwarding industry is
subject to regulatory and legislative changes that can affect the economics of
the industry by requiring changes in operating practices or influencing the
demand for, and the costs of providing, services to customers.
Our surface freight forwarding operations are subject to various federal
statutes and are regulated by the Surface Transportation Board. This federal
agency has broad investigatory and regulatory powers, including the power to
issue a certificate of authority or license to engage in the business, to
approve specified mergers, consolidations and acquisitions, and to regulate the
delivery of some types of domestic shipments and operations within particular
9
geographic areas. The Surface Transportation Board and U.S. Department of
Transportation also have the authority to regulate interstate motor carrier
operations, including the regulation of certain rates, charges and accounting
systems, to require periodic financial reporting, and to regulate insurance,
driver qualifications, operation of motor vehicles, parts and accessories for
motor vehicle equipment, hours of service of drivers, inspection, repair,
maintenance standards and other safety related matters. The federal laws
governing interstate motor carriers have both direct and indirect application to
the Company. The breadth and scope of the federal regulations may affect the
operations of the Company and the motor carriers which we use to provide
transportation services. In certain locations, state or local permits or
registrations may also be required to provide or obtain intrastate motor carrier
services for the Company. Our property brokerage operations similarly subject us
to various federal statutes and regulation as a property broker by the Surface
Transportation Board, and we have obtained a property broker license and posted
a surety bond as required by federal law. Our international operations are
subject to regulation by the Federal Maritime Commission, or FMC, as it
regulates and licenses ocean forwarding operations. Indirect ocean carriers
(non-vessel operating common carriers) are subject to FMC regulation, under the
FMC tariff filing and surety bond requirements, and under the Shipping Act of
1984, particularly those terms proscribing rebating practices.
Our customs brokerage operations are subject to the licensing
requirements of the U.S. Treasury and are regulated by the U.S. Customs Service.
Foreign customs brokerage operations are also licensed in and subject to the
regulations of their respective countries.
In the United States, we are also subject to federal, state and local
provisions relating to the discharge of materials into the environment or
otherwise for the protection of the environment. Similar laws apply in many
foreign jurisdictions in which we operate or may operate in the future. Although
current operations have not been significantly affected by compliance with these
environmental laws, governments are becoming increasingly sensitive to
environmental issues, and we cannot predict what impact future environmental
regulations may have on our business. We do not anticipate making any material
capital expenditures for environmental control purposes.
PERSONNEL
At December 31, 2003, we had 827 employees of which 622 employees were
engaged in operations, 57 in sales and marketing, and 148 in finance,
administration and management functions.
None of our employees are covered by a collective bargaining agreement,
and we believe that we have a good relationship with our employees.
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, we changed our business strategy to focus on the acquisition
of operating businesses within a particular industry segment.
After having evaluated a number of different industries, during the
second quarter of 2001 we focused our acquisition efforts specifically on the
transportation and logistics industry as it:
o demonstrated significant growth characteristics as an increasing
number of businesses outsource their supply-chain management in
order to achieve cost-effective logistics solutions;
o is positioned for further consolidation as many sectors of the
industry remain fragmented; and
o is capable of achieving enhanced efficiencies through the adoption
of e-commerce and other technologies.
This decision occurred in conjunction with our June 21, 2001 appointment of
Dennis L. Pelino as our Chairman and Chief Executive Officer. Mr. Pelino brings
to us over 25 years of logistics experience, including as President and Chief
Operating Officer of Fritz Companies, Inc., where he was employed from 1987 to
1999.
10
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 those of our continuing operations and are presented as discontinued
operations.
CORPORATE INFORMATION
Stonepath Group, Inc. was incorporated in Delaware in 1998. Our
principal executive offices are located at 1600 Market Street, Suite 1515,
Philadelphia, Pennsylvania. Our telephone number is (215) 979-8370 and our
Internet website address is www.stonepath.com. We make available free of charge
on our website all materials that we file with the Securities and Exchange
Commission, including our Annual Report on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K and amendments to these reports as soon as
reasonably practicable after such materials have been filed with, or furnished
to, the Securities and Exchange Commission.
SEGMENT INFORMATION
For additional information about our business segments, see the business
segment information presented in Note 16 to the consolidated financial
statements.
RISKS PARTICULAR TO OUR BUSINESS
o IF WE ARE UNABLE TO PROFITABLY MANAGE AND INTEGRATE THE COMPANIES WE
ACQUIRE OR ARE UNABLE TO ACQUIRE ADDITIONAL COMPANIES, WE WILL NOT ACHIEVE OUR
GROWTH AND PROFIT OBJECTIVES.
Our goal is to build a global logistics services organization. Realizing
this goal will require the acquisition of a number of diverse companies in the
logistics industry covering a variety of geographic regions and specialized
service offerings. There can be no assurance that we will be able to identify,
acquire or profitably manage additional businesses or successfully integrate any
acquired businesses without substantial costs, delays or other operational or
financial problems. Further, acquisitions involve a number of risks, including
possible adverse effects on our operating results, diversion of management
resources, failure to retain key personnel, and risks associated with
unanticipated liabilities, some or all of which could have a material adverse
effect on our business, financial condition and results of operations.
o ADDITIONAL FINANCING WILL BE REQUIRED TO IMPLEMENT OUR BUSINESS
STRATEGY.
We believe that our current working capital and anticipated cash flow
from operations are adequate to fund existing operations. Our ability to
complete further acquisitions, however, is limited until we raise additional
capital, primarily due to limitations under our existing credit facility and in
view of anticipated expenditures that will be required to satisfy acquisition
related earn-out payments that will be due in April 2004 and beyond. We may
finance acquisitions, however, using our securities for all or some portion of
the consideration. In the event that our common stock does not attain or
maintain a sufficient market value or potential acquisition candidates are
otherwise unwilling to accept our securities as part of the purchase price for
the sale of their businesses, we may be required to utilize more of our cash
resources, if available, in order to continue our acquisition program. If we do
not have sufficient cash resources through either operations or from debt
facilities, our growth could be limited unless we are able to obtain such
additional capital.
o EARN-OUT PAYMENTS DUE IN CONNECTION WITH OUR ACQUISITIONS COULD
REQUIRE US TO INCUR ADDITIONAL INDEBTEDNESS OR ISSUE ADDITIONAL EQUITY
SECURITIES.
We are required to make significant cash payments in the future when and
if the earn-out installments for our acquisitions become due. While we believe
that some portion of the required cash will be generated by each of the acquired
subsidiaries, we most likely will have to secure additional sources of capital
to fund some portion of the earn-out payments as they become due. This may
require us to incur additional indebtedness or issue additional equity
securities. We cannot be certain that we will be able to borrow any funds for
this purpose on terms acceptable to us, if at all, or that once we incur such
indebtedness, that we will be able to operate profitably. Additional
indebtedness could negatively impact our cash flow and ability to make further
acquisitions. Issuing additional
11
shares of common stock or common stock equivalents to generate the required
financing would increase the number of shares outstanding and further dilute the
interests of our existing shareholders.
o OUR AMENDED CREDIT FACILITY PROHIBITS FURTHER ACQUISITIONS AND
LIMITS EARN-OUT PAYMENTS.
The terms of our credit facility were amended on November 17, 2004 to
preclude further acquisitions. The amendment also, among other things, precludes
distribution of future earn-out payments unless the undrawn availability under
the credit facility averages $2.5 million for the 60 days preceding the payment
and will be at least $2.5 million after giving effect to the payment. This
amendment prevents the Company from pursuing its acquisition strategy until the
credit facility is replaced. It also creates the possibility that earn-out
payments cannot be made when due.
o OUR AMENDED CREDIT FACILITY REQUIRES REPAYMENT ON ITS EXPIRATION
DATE OF JANUARY 31, 2006.
The term of our amended credit agreement was reduced from May 15, 2007
to January 31, 2006. There is an absolute need to replace this facility on or
before the expiration date to resume the Company's acquisition strategy to grow
through acquisitions and to provide sufficient liquidity to continue to finance
existing and future working capital needs. Although we believe the Company will
generate free cash flow in 2005, it will be insufficient in amount to repay this
facility and finance working capital needs of the Company at the facility's
expiration date. There can be no assurance that the Company can replace this
facility with a new facility containing terms with which the Company can comply.
o DUE TO OUR ACQUISITION STRATEGY, OUR EARNINGS WILL BE ADVERSELY
AFFECTED BY NON-CASH CHARGES RELATING TO THE AMORTIZATION OF INTANGIBLES.
Under applicable accounting standards, purchasers are required to
allocate the total consideration paid in a business combination to the
identified acquired assets and liabilities based on their fair values at the
time of acquisition. The excess of the consideration paid in a business
combination over the fair value of the identifiable tangible assets acquired is
to be allocated among identifiable intangible assets and goodwill. The amount
allocated to goodwill is not subject to amortization. However, it is tested at
least annually for impairment. The amount allocated to identifiable intangibles,
such as customer relationships and the like, is amortized over the life of these
intangible assets. This subjects us to periodic charges against our earnings to
the extent of the amortization incurred for that period. Because our business
strategy focuses on growth through acquisitions, our future earnings will be
subject to greater non-cash amortization charges than a company whose earnings
are derived organically. As a result, we will experience an increase in non-cash
charges related to the amortization of intangible assets acquired in our
acquisitions. This will create the appearance, based on our financial
statements, that our intangible assets are diminishing in value, when in fact
they may be increasing because we are growing the value of our intangible assets
(e.g., customer relationships). Because of this discrepancy, we believe EBITDA
provides a meaningful measure of our financial performance. However, the
investment community generally measures a public company's performance by its
net income. Thus, while we believe EBITDA provides a meaningful measure of our
financial performance, should the investment community elect to place more
emphasis on our net income, the future price of our common stock could be
adversely affected.
o SINCE WE ARE NOT OBLIGATED TO FOLLOW ANY PARTICULAR CRITERIA OR
STANDARDS FOR ACQUISITION CANDIDATES, SHAREHOLDERS MUST RELY SOLELY ON OUR
ABILITY TO IDENTIFY, EVALUATE AND COMPLETE ACQUISITIONS.
Even though we have developed general acquisition guidelines, we are not
obligated to follow any particular operating, financial, geographic or other
criteria in evaluating candidates for potential acquisitions or business
combinations. We target companies which we believe will provide the best
potential for long-term financial return for our shareholders and we determine
the purchase price and other terms and conditions of acquisitions. Our
shareholders will not have the opportunity to evaluate the relevant economic,
financial and other information that we will use and consider in deciding
whether or not to enter into a particular transaction.
12
o THE SCARCITY OF, AND COMPETITION FOR, ACQUISITION OPPORTUNITIES
MAKES IT MORE DIFFICULT TO COMPLETE ACQUISITIONS.
There are a limited number of operating companies available for
acquisition which we consider desirable. In addition, there is a high level of
competition to acquire these operating companies. A large number of established
and well-financed entities are active in acquiring the type of companies we
believe are desirable. Many of these entities have significantly greater
financial resources than we have. Consequently, we are at a competitive
disadvantage in negotiating and executing possible acquisitions of these
businesses. Even if we are able to successfully compete with these entities,
this competition may affect the terms of completed transactions and, as a
result, we may pay more than we expected for potential acquisitions. We may find
it difficult to identify operating companies that complement our strategy, and
even if we identify a company that complements our strategy, we may be unable to
complete an acquisition of such a company for many reasons, including:
o a failure to agree on the terms necessary for a transaction, such as
purchase price;
o incompatibility of operating strategies and management philosophies;
o competition from other acquirers of operating companies;
o insufficient capital to acquire a profitable logistics company; and
o the unwillingness of a potential acquiree to work with our
management or our affiliated companies.
We will not be able to successfully implement our business plan if we
are unable to successfully compete with other entities in acquiring the
companies we target.
o THE ISSUANCE OF ADDITIONAL SECURITIES MAY CAUSE ADDITIONAL DILUTION
TO THE INTERESTS OF OUR EXISTING SHAREHOLDERS.
The additional financing required to fund our acquisition strategy may
require us to issue additional shares of common stock or common stock
equivalents to generate the required financing. For example, we issued 6,024,908
shares of our common stock in a private placement transaction that closed in
October 2003. We could offer additional shares in private placements
transactions or public offerings. We recently filed a "shelf" registration
statement with the SEC that will enable us to publicly sell $50.0 million of
securities in the near term. Any issuances of securities in the future will
further increase the number of shares outstanding and further dilute the
interests of our existing shareholders. We may issue more shares of common stock
for this purpose without prior notice to our shareholders.
We may also issue securities to, among other things, facilitate a
business combination, acquire assets or stock of another business, compensate
employees or consultants or for other valid business reasons at the discretion
of our Board of Directors, which could further dilute the interests of our
existing shareholders.
o THE EXERCISE OR CONVERSION OF OUR OUTSTANDING OPTIONS, WARRANTS OR
OTHER CONVERTIBLE SECURITIES OR ANY DERIVATIVE SECURITIES WE ISSUE IN THE FUTURE
WILL RESULT IN THE DILUTION OF OUR EXISTING SHAREHOLDERS AND MAY CREATE DOWNWARD
PRESSURE ON THE TRADING PRICE OF OUR COMMON STOCK.
We are currently authorized to issue 100,000,000 shares of common stock.
As of March 1, 2004, we had 39,004,242 outstanding shares of common stock. We
may in the future issue up to 16,221,867 additional shares of our common stock
upon conversion or exercise of existing outstanding convertible securities,
options and warrants in accordance with the following schedule:
Number of Shares Proceeds
---------------- ---------------
Shares issuable upon conversion of the
Series D preferred stock 3,093,970 $ -
Options outstanding under our stock
option plan 10,313,634 15,522,126
Non-plan options 1,326,700 2,774,250
Warrants 1,487,563 1,547,573
---------------- ---------------
Total 16,221,867 $ 19,843,949
================ ===============
13
Even though the aggregate exercise of these securities could generate
material proceeds for us, the issuance of these additional shares of common
stock would result in the dilution of the ownership interests of our existing
common shareholders and the market price of our common stock could be adversely
affected.
o WE RELY ON A SMALL NUMBER OF KEY CUSTOMERS, THE LOSS OF ANY OF WHICH
WOULD HAVE A NEGATIVE EFFECT ON OUR RESULTS OF OPERATIONS.
Even though our customer base is diversifying as we grow through
acquisitions, it remains highly concentrated. For the year ended December 31,
2003 our largest customer, Best Buy Co., Inc., a national retail chain,
accounted for approximately 24% of our total revenue. Our next five largest
customers accounted for approximately 22% of our total revenue, with none of
these customers accounting for 10% or more of our total revenue. We believe the
risk posed by this concentration is mitigated by our longstanding and continuing
relationships with these customers and we are confident that these relationships
will remain ongoing for the foreseeable future. We intend to continue to provide
superior service to all of our customers and have no expectation that revenue
from any of these customers will be reduced as a result of any factors within
our control. However, adverse conditions in the industries of our customers
could cause us to lose a significant customer or experience a decrease in
shipment volume. Either of these events could negatively impact us. Our
immediate plans, however, are to reduce our dependence on any particular
customer or customers by increasing our sales and customer base by, among other
things, diversifying our service offerings and continuing with our growth
strategy.
o THE RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS COULD ADVERSELY
AFFECT OUR OPERATIONS AND ABILITY TO GROW OUTSIDE OF THE UNITED STATES.
A significant portion of our revenue is derived from our international
operations and the growth of those operations is an important part of our
business strategy. Our current international operations are focused on the
shipment of goods into and out of the United States and are dependent on the
volume of international trade with the United States. Our strategic plan
contemplates the growth of those operations as well as expanding into the
transportation of goods wholly outside of the United States. The following
factors could adversely affect our current international operations as well as
the growth of those operations:
o the political and economic systems in certain international markets
are less stable than in the United States;
o wars, civil unrest, acts of terrorism and other conflicts exist in
certain international markets;
o export restrictions, tariffs, licenses and other trade barriers can
adversely affect the international trade serviced by our
international operations;
o managing distant operations with different local market conditions
and practices is more difficult than managing domestic operations;
o differing technology standards in other countries present
difficulties and incremental expense in integrating our services
across international markets;
o complex foreign laws and treaties can adversely affect our ability
to compete; and
o our ability to repatriate funds may be limited by tax ramifications
and foreign exchange controls.
o TERRORIST ATTACKS AND OTHER ACTS OF VIOLENCE OR WAR MAY AFFECT ANY
MARKET ON WHICH OUR SHARES TRADE, THE MARKETS IN WHICH WE OPERATE, OUR
OPERATIONS AND OUR PROFITABILITY.
Terrorist acts or acts of war or armed conflict could negatively affect
our operations in a number of ways. Any of these acts could result in increased
volatility in or damage to the United States and worldwide financial markets and
economy. Acts of terrorism or armed conflict, and the uncertainty caused by such
conflicts, could cause an overall reduction in worldwide sales of goods and
corresponding shipments of goods. This would have a negative
14
effect on our operations. Also, terrorist activities similar to the type
experienced on September 11, 2001 could result in another halt of trading of
securities on the American Stock Exchange, which could also have an adverse
effect on the trading price of our shares and overall market capitalization.
o WE DEPEND ON THE CONTINUED SERVICE OF CERTAIN EXECUTIVE OFFICERS. WE
CAN NOT ASSURE YOU THAT WE WILL BE ABLE TO RETAIN THESE PERSONS.
For the foreseeable future, our success will depend largely on the
continued services of Dennis L. Pelino, our Chairman, as well as Jason Totah
(our Chief Executive Officer, effective October 20, 2004), because of their
collective industry knowledge, marketing skills and relationships with major
vendors and customers. We have employment agreements with each of these
individuals which contain a non-competition covenant which survives their actual
term of employment. Nevertheless, should either of these individuals leave the
Company, it could have a material adverse effect on our future results of
operations. Effective July 15, 2004, Gary Koch resigned. Mr. Koch previously
headed our domestic service organization, which now reports to Mr. Totah.
o WE FACE INTENSE COMPETITION IN OUR INDUSTRY.
The freight forwarding, logistics and supply chain management industry
is intensely competitive and is expected to remain so for the foreseeable
future. We face competition from a number of companies, including many that have
significantly greater financial, technical and marketing resources. There are a
large number of companies competing in one or more segments of the industry,
although the number of firms with a global network that offer a full complement
of freight forwarding and supply chain management services is more limited.
Depending on the location of the customer and the scope of services requested,
we must compete against both the niche players and larger entities. In addition,
customers increasingly are turning to competitive bidding situations involving
bids from a number of competitors, including competitors that are larger than we
are.
o OUR STOCK PRICE MAY BE VOLATILE DUE TO FACTORS UNDER, AS WELL AS OUT
OF, OUR CONTROL.
The market price of our common stock has been highly volatile. Some
factors that may affect the market price in the future include:
o actual or anticipated fluctuations in our operating results;
o announcements of technological innovations or new commercial
products or services by us or our competitors;
o a continued weakening of general market conditions which in turn
could have a depressive effect on the volume of goods shipped and
shipments that we manage or arrange;
o acts of global terrorism or armed conflicts; and
o changes in recommendations or earnings estimates by us or by
securities analysts.
Furthermore, the stock market has historically experienced volatility
which has particularly affected the market prices of securities of many
companies with a small market capitalization and which sometimes has been
unrelated to the operating performances of such companies.
o OUR CASH FLOW WILL BE ADVERSELY AFFECTED IN THE FUTURE ONCE WE MAKE
USE OF OUR CONSOLIDATED NET OPERATING LOSS CARRYFORWARD AVAILABLE TO OFFSET
FUTURE EARNINGS.
Due to losses we incurred in our former business model, we have
accumulated a net operating loss carryforward for federal income tax purposes.
As of December 31, 2003, approximately $24.9 million of these losses were
available to offset our taxable income until the losses are fully utilized. Once
these available losses have been utilized, our cash flows will be affected
accordingly. We do not anticipate paying federal income taxes in the near future
as we expect that our existing net operating loss carryforward should be
sufficient to offset any taxable income that is generated.
15
However, additional sales of our securities could have the effect of
significantly limiting our ability to utilize our existing net operating loss
carryforward in the future.
o IF WE FAIL TO IMPROVE OUR MANAGEMENT INFORMATION AND FINANCIAL
REPORTING SYSTEMS, WE MAY EXPERIENCE AN ADVERSE EFFECT ON OUR OPERATIONS AND
FINANCIAL CONDITION.
Our management information and financial reporting systems need to be
improved.
In January 2004, we restated our 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 as the 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. We 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. This error caused an overstatement of total revenue and a
corresponding overstatement of the cost of transportation, with no resulting
impact on net revenue, EBITDA or net income.
On September 21, 2004, the Company announced in a filing with the
Securities and Exchange Commission on Form 8-K that its consolidated financial
statements for 2003 and the first and second quarters of 2004 should not be
relied upon. Since that filing, the Company has analyzed its costs of purchased
transportation and certain revenue transactions. The results of this analysis
led the Company to restate its consolidated financial statements with respect to
those items as well as consequential effects on income taxes and earn-out
payments for the years ended December 31, 2003, 2002 and 2001. These errors
resulted in an overstatement of revenues by $0.2 million in 2003, an
understatement in purchased transportation costs by $4.4 million in 2003, $1.6
million in 2002, and $0.3 million in 2001 and an understatement of income tax
expense of $2.0 million in 2003, $0.3 million in 2002 and $0.1 million in 2001.
These restatements also reduced goodwill by $4.3 million at December 31, 2003
and $1.3 million at December 31, 2002. Net income was reduced by $7.9 million,
including a reserve of $1.3 million related to excess earn-out payments in 2003,
$1.9 million in 2002 and $0.3 million in 2001.
We believe that the presence of the error in the second preceding
paragraph, in and of itself, constitutes a reportable condition while the error
in the first preceding paragraph constitutes a material weakness 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. A material weakness in
internal accounting control is a condition in which the specific control
procedures or the degree of compliance with them do not reduce to relatively low
level the risk that errors or irregularities in amounts that would be material
in relation to the financial statements may occur and not be detected within a
timely period by employees in the normal course of performing their assigned
tasks. To specifically respond to these matters, and in general to meet our
obligations under Section 404 of the Sarbanes-Oxley Act of 2002, we have
commenced an overall review of our internal controls over financial reporting.
As part of the assessment of our internal controls over financial reporting, we
are focusing on our recent growth in terms of both size and complexity, coupled
with the fact that our finance and accounting functions are largely
decentralized. Although this review is not yet completed, we have initiated
immediate changes in the processes to correct the errors that occurred and to
reduce the likelihood that similar errors could occur in the future.
While we believe we have a plan that, when completed, will eliminate the
reportable condition and material weakness described above, we may experience
delays, disruptions and unanticipated expenses in completing that plan and in
otherwise implementing, integrating and operating our consolidated management
information and financial reporting systems. Failure to enhance these systems
could delay our receipt of management and financial information at the
consolidated level which could disrupt our operations or impair our ability to
monitor our operations and have a negative effect on our financial condition.
16
o BECAUSE WE ARE A HOLDING COMPANY, WE DEPEND ON RECEIVING
DISTRIBUTIONS FROM OUR SUBSIDIARIES AND WE COULD BE HARMED IF SUCH DISTRIBUTIONS
COULD NOT BE MADE IN THE FUTURE.
We are a holding company and all of our operations are conducted through
subsidiaries. Consequently, we rely on dividends or advances from our
subsidiaries. The ability of our subsidiaries to pay dividends and our ability
to receive distributions from those subsidiaries are subject to applicable local
law and other restrictions including, but not limited to, applicable tax laws.
Such laws and restrictions could limit the payment of dividends and
distributions to us which would restrict our ability to continue operations.
o WE BELIEVE OUR INDUSTRY IS CONSOLIDATING AND IF WE CANNOT GAIN
SUFFICIENT MARKET PRESENCE, WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST
LARGER GLOBAL COMPANIES.
We believe the market trend within our industry is towards consolidation
of the niche players into larger companies which are attempting to increase
global operations through the acquisition of regional and local freight
forwarders. If we cannot gain sufficient market presence or otherwise establish
a successful strategy in our industry, we may not be able to compete
successfully against larger companies in our industry with global operations.
o WE MAY BE REQUIRED TO INCUR MATERIAL EXPENSES IN DEFENDING OR
RESOLVING OUTSTANDING LAWSUITS WHICH WOULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS.
We are a defendant in a number of legal proceedings, including those we
have identified as material in our periodic SEC filings. Although we believe
that the claims asserted in these proceedings are without merit, and we intend
to vigorously defend these matters, we could incur material expenses in the
defense and resolution of these matters. Since we have not established any
reserves in connection with these claims, any such liability would be recorded
as an expense in the period incurred or estimated. This amount, even if not
material to our overall financial condition, could adversely affect our results
of operations in the period recorded.
o WE HAVE A LIMITED OPERATING HISTORY UPON WHICH YOU CAN EVALUATE OUR
PROSPECTS.
During 2001, we discontinued our former business model of developing
early-stage technology businesses, and adopted a new model of delivering
non-asset based third-party logistics services. The first acquisition under our
new business model occurred on October 5, 2001. Subsequent acquisitions were
completed during 2002, 2003 and 2004. As a result, we have a limited operating
history under our current business model. Even though we are managed by senior
executives with significant experience in the industry, our limited operating
history makes it difficult to predict the longer-term success of our business
model.
o PROVISIONS OF OUR CHARTER AND APPLICABLE DELAWARE LAW MAY MAKE IT
MORE DIFFICULT TO COMPLETE A CONTESTED TAKEOVER OF OUR COMPANY.
Certain provisions of our certificate of incorporation and the General
Corporation Law of the State of Delaware (the "GCL") could deter a change in our
management or render more difficult an attempt to obtain control of us, even if
such a proposal is favored by a majority of our shareholders. For example, we
are subject to the provisions of the GCL that prohibit a public Delaware
corporation from engaging in a broad range of business combinations with a
person who, together with affiliates and associates, owns 15% or more of the
corporation's outstanding voting shares (an "interested shareholder") for three
years after the person became an interested shareholder, unless the business
combination is approved in a prescribed manner. Finally, our certificate of
incorporation includes undesignated preferred stock, which may enable our Board
of Directors to discourage an attempt to obtain control of us by means of a
tender offer, proxy contest, merger or otherwise.
17
ITEM 2. PROPERTIES
The Company does not own any real estate and currently leases all of its
facilities.
Our corporate headquarters is located at 1600 Market Street, Suite 1515,
Philadelphia, Pennsylvania where we lease approximately 4,000 square feet of
office space.
As of March 1, 2004, we leased and maintained logistics facilities in 23
locations throughout the United States plus 11 international locations. The
majority of these locations are operating terminals that contain office space
and warehouse or cross-dock facilities and range in size from approximately
1,200 square feet to 160,000 square feet. A few of these facilities are limited
to a small sales and administrative office.
Lease terms for our principal properties are generally up to five years
and terminate at various times through 2010, while a few of the smaller
facilities are leased on a month-to-month basis. The Company believes that
current leases can be extended and that suitable alternative facilities are
available in the vicinity of existing facilities should extensions be
unavailable or undesirable at the end of the current lease arrangements.
Our facilities are situated in the following locations:
Philadelphia, Corporate headquarters New York, NY
Minneapolis (2 locations) El Paso
Seattle Boston
Chicago Portland, ME
Detroit Los Angeles
Dallas/Fort Worth San Francisco
St. Louis Miami
Atlanta Puerto Rico
Indianapolis Hong Kong
Phoenix Singapore (2 locations)
Salt Lake City Malaysia (3 locations)
Washington, D.C. (2 locations) Cambodia
Norfolk Shanghai, PRC (2 locations)
Milwaukee Nanjing, PRC
ITEM 3. LEGAL PROCEEDINGS
The Company has been named as a defendant in eight purported class
action complaints filed in the United States Court for the Eastern District of
Pennsylvania between September 24, 2004 and November 19, 2004. Also named as
defendants in these actions are officers Dennis L. Pelino and Thomas L. Scully
and former officer Bohn H. Crain. These cases have now been consolidated for all
purposes in that Court under the caption In re Stonepath Group, Inc. Securities
Litigation, Civ. Action No. 04-4515. The plaintiffs seek to represent a class of
purchasers of the Company's shares between May 7, 2003 and September 20, 2004,
and allege claims for securities fraud under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. These claims are based upon the allegation that
certain public statements made during the period from May 7, 2003 through August
9, 2004 were materially false and misleading because they failed to disclose
that the Company's Domestic Services operations had improperly accounted for
accrued purchased transportation costs. The plaintiffs are seeking compensatory
damages, attorneys' fees and costs, and further relief as may be determined by
the Court. The Court's order consolidating the eight lawsuits envisions that the
plaintiffs will file a consolidated amended complaint, which has not yet
occurred. The Company and the individual defendants believe that the plaintiffs'
claims are without merit and intend to vigorously defend against them.
18
The Company has been named as a nominal defendant in a shareholder
derivative action on behalf of the Company that was filed on October 12, 2004 in
the United States District Court for the Eastern District of Pennsylvania under
the caption Ronald Jeffrey Neer v. Dennis L. Pelino, et al., Civ. A. No.
04-cv-4971. Also named as defendants in the action are all of the individuals
who were serving as directors of the Company when the complaint was filed
(Dennis L. Pelino, J. Douglas Coates, Robert McCord, David R. Jones, Aloysius T.
Lawn and John H. Springer), former directors Andrew Panzo, Lee C. Hansen, Darr
Aley, Stephen George, Michela O'Connor-Abrams, and Frank Palma, officer Thomas
L. Scully and former officers Bohn H. Crain and Stephen M. Cohen. The derivative
action alleges breach of fiduciary duty, abuse of control, gross mismanagement,
waste of corporate assets, unjust enrichment and violations of the
Sarbanes-Oxley Act of 2002. These claims are based upon the allegation that the
defendants knew or should have known that the Company's public filings for
fiscal years 2001, 2002 and 2003 and for the first and second quarters of fiscal
year 2004, and certain press releases and public statements made during the
period from May 7, 2003 through August 9, 2004, were materially misleading
because they failed to disclose that the Company's Domestic Services operations
had improperly accounted for accrued purchased transportation costs. The
derivative action seeks compensatory damages in favor of the Company, attorneys'
fees and costs, and further relief as may be determined by the Court. The
defendants believe that this action is without merit, have filed a motion to
dismiss this action, and intend to vigorously defend themselves against the
claims raised in this action.
The Company is also involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse effect on
the Company's consolidated financial position, results of operations or
liquidity. No accruals have been established for any pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the American Stock Exchange under the
symbol "STG." The table below sets forth the high and low prices for our common
stock for the quarters included within 2003 and 2002.
HIGH LOW
-------- --------
Year ended December 31, 2003
First quarter $ 1.84 $ 1.40
Second quarter 2.79 1.75
Third quarter 3.14 2.00
Fourth quarter 2.99 2.26
Year ended December 31, 2002
First quarter 2.15 1.20
Second quarter 2.95 1.10
Third quarter 1.70 0.95
Fourth quarter 1.74 1.01
19
SHARE INFORMATION
As of March 1, 2004 there were 39,004,242 shares of our common stock
outstanding, owned by 266 registered holders of record. Management estimates
there are over 3,000 stockholders holding their stock in nominee name. We have
not paid cash dividends on our common stock and do not anticipate or contemplate
paying cash dividends in the foreseeable future. We plan to retain any earnings
for use in the operations of our business and to fund our acquisition strategy.
Furthermore, we are limited in our ability to pay dividends under the terms of
our outstanding credit facility.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information, as of December 31, 2003,
with respect to the Company's stock option plan under which common stock is
authorized for issuance, as well as other compensatory options granted outside
of the Company's stock option plan.
(a) (b) (c)
----------------------- -------------------- -----------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE EQUITY COMPENSATION
BE ISSUED UPON EXERCISE EXERCISE PRICE OF PLAN (EXCLUDING
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, SECURITIES REFLECTED IN
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS COLUMN (a))
-------------------------------------- ----------------------- -------------------- -----------------------
Equity compensation plans approved
by security holders 8,769,434 $ 1.27 3,688,067(1)
Equity compensation plans not approved
by security holders 1,834,700 $ 1.79 --
----------------------- -----------------------
Total 10,604,134 $ 1.36 3,688,067
======================= =======================
----------
(1) Does not include options to purchase 542,499 shares of our common stock
under the Company's stock option plan which have been exercised.
RECENT SALES OF UNREGISTERED SECURITIES
1. On November 26, 2003, we issued an aggregate of 592,273 shares of
our common stock to G-Link Express Pte., Ltd. and G-Link Express (Cambodia)
Pte., Ltd., in consideration for the excess working capital component associated
with the acquisition of the assets and operations of the Singapore and Cambodia
offices of the G-Link Group of companies. The shares were valued at $1,516,220
($2.56 per share) and were issued in a private placement transaction exempt from
the registration requirements of the Securities Act of 1933, as amended,
pursuant to Section 4(2) and Rule 506 thereunder, as an issuer transaction not
involving a public offering, and pursuant to Regulation S.
2. On December 17, 2003, we issued 87,164 shares of our common stock to
East Ocean Logistics Ltd. as partial consideration for the acquisition of the
assets and operations associated with the Hong Kong-based business of East Ocean
Logistics Ltd. The shares were valued, for purposes of the acquisition, at
$227,500 ($2.61 per share), and were issued in a private placement transaction
exempt from the registration requirements of the Securities Act of 1933, as
amended, pursuant to Section 4(2) and Rule 506 thereunder, as an issuer
transaction not involving a public offering, and pursuant to Regulation S.
3. On December 22, 2003, we issued an aggregate of 48,676 shares of our
common stock to GLE Transport Services Sdn. Bhd., GLE Shipping Penang Sdn. Bhd.
and GLE Shipping (Johor Bahru) Sdn. Bhd. as partial consideration for the
acquisition of the assets and operations of three Malaysian offices of the
G-Link Group of companies. The shares were valued, for purposes of the
acquisition, at $119,355 ($2.452 per share), and were issued in a private
placement transaction exempt from the registration requirements of the
Securities Act of 1933, as amended, pursuant to Section 4(2) and Rule 506
thereunder, as an issuer transaction not involving a public offering, and
pursuant to Regulation S.
4. On December 22, 2003, we issued 66,284 shares of our common stock to
Planet Logistics Pte. Ltd. as partial consideration for the acquisition of the
assets and operations associated with the Singapore-based business of Planet
Logistics Pte. Ltd. The shares were valued, for purposes of the acquisition, at
$173,000 ($2.61 per share), and
20
were issued in a private placement transaction exempt from the registration
requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2)
and Rule 506 thereunder, as an issuer transaction not involving a public
offering, and pursuant to Regulation S.
5. On February 9, 2004, we issued 630,915 shares of our common stock to
Andy Tsai as partial consideration for the acquisition of an interest in the
freight forwarding business formerly operated by Mr. Tsai as the Shanghai branch
of Shaanxi Sunshine Express International Co., Ltd. The shares were valued, for
purposes of the acquisition, at $2,000,000 ($3.17 per share), and were issued in
a private placement transaction exempt from the registration requirements of the
Securities Act of 1933, as amended, pursuant to Section 4(2) and Rule 506
thereunder, as an issuer transaction not involving a public offering, and
pursuant to Regulation S.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of and for the dates indicated
have been derived from our consolidated financial statements and the combined
financial statements of our predecessor, Air Plus. 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, 2003 and the
balance sheet data of the Company as of December 31, 2003 and 2002 are derived
from the Company's consolidated financial statements, as revised to reflect the
restatement as more fully discussed in Note 3 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 the years ended December 31, 2000 and 1999 and the balance sheet
data of the Company as of December 31, 2001, 2000 and 1999 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
six months ended June 30, 2001 is derived from Air Plus' combined financial
statements which are unaudited and which are not 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.
21
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STONEPATH GROUP, INC.
YEAR ENDED DECEMBER 31, AIR PLUS
-------------------------------------------------------------- -------------
SIX MONTHS
ENDED JUNE
RESTATED RESTATED RESTATED 30, 2001
2003 2002 2001 2000 1999 (UNAUDITED)
---------- ---------- ---------- ---------- ---------- -------------
Total revenue $ 220,084 $ 122,788 $ 15,598 $ -- $ -- $ 26,015
Cost of transportation 158,106 86,085 10,009 -- -- 15,679
---------- ---------- ---------- ---------- ---------- -------------
Net revenue 61,978 36,703 5,589 -- -- 10,336
Operating expenses 60,300 35,956 10,409 7,420 2,761 9,660
---------- ---------- ---------- ---------- ---------- -------------
Income (loss) from operations 1,678 747 (4,820) (7,420) (2,761) 676
Other income (expense) (1,278) 128 1,295 2,065 (2,812) (24)
---------- ---------- ---------- ---------- ---------- -------------
Income (loss) from continuing operations before
income taxes and minority interest 400 875 (3,525) (5,355) (5,573) 652
Income tax expense 736 421 71 -- -- --
---------- ---------- ---------- ---------- ---------- -------------
Income (loss) from continuing operations before
minority interest (336) 454 (3,596) (5,355) (5,573) 652
Minority interest 187 -- -- -- -- --
---------- ---------- ---------- ---------- ---------- -------------
Income (loss) from continuing operations (523) 454 (3,596) (5,355) (5,573) 652
Loss from discontinued operations (263) -- (13,863) (30,816) (18,258) --
---------- ---------- ---------- ---------- ---------- -------------
Net income (loss) (786) 454 (17,459) (36,171) (23,831) 652
Preferred stock dividends -- 15,020 (4,151) (45,751) (6,605) --
---------- ---------- ---------- ---------- ---------- -------------
Net income (loss) attributable to
common stockholders $ (786) $ 15,474 $ (21,610) $ (81,922) $ (30,436) $ 652
========== ========== ========== ========== ========== =============
Basic earnings (loss) per common share:
Continuing operations $ (0.02) $ 0.70 $ (0.38) $ (2.89) $ (1.15)
Discontinued operations (0.01) -- (0.68) (1.75) (1.73)
---------- ---------- ---------- ---------- ----------
$ (0.03) $ 0.70 $ (1.06) $ (4.64) $ (2.88)
---------- ---------- ---------- ---------- ----------
Diluted earnings (loss) per common share (1)
Continuing operations $ (0.02) $ 0.02 $ (0.38) $ (2.89) $ (1.15)
Discontinued operations (0.01) -- (0.68) (1.75) (1.73)
---------- ---------- ---------- ---------- ----------
$ (0.03) $ 0.02 $ (1.06) $ (4.64) $ (2.88)
========== ========== ========== ========== ==========
Weighted average common shares:
Basic 29,626 22,155 20,510 17,658 10,558
---------- ---------- ---------- ---------- ----------
Diluted 29,626 29,233 20,510 17,658 10,558
========== ========== ========== ========== ==========
CONSOLIDATED BALANCE SHEET DATA: (IN THOUSANDS)
STONEPATH GROUP, INC.
DECEMBER 31,
----------------------------------------------------
RESTATED RESTATED RESTATED
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Cash and cash equivalents $ 3,074 $ 2,266 $ 15,228 $ 29,100 $ 3,127
Working capital (deficit) 13,127 4,709 15,081 27,713 (4,213)
Total assets 90,269 53,985 40,714 44,911 13,989
Long-term debt and redeemable
preferred stock 1,135 -- -- -- 4,516
Stockholders' equity 56,323 33,165 32,092 43,326 1,701
----------
(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.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 control
solutions. We service a customer base of manufacturers, distributors and
national retail chains through a network of offices in 21 major metropolitan
areas in North America, Puerto Rico and ten locations in Asia, using an
extensive network of independent carriers and 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 dollar volume of our
purchased transportation services enables us to negotiate attractive pricing
with our transportation providers.
Although our strategic objective is to build a leading global logistics
services organization that integrates established operating businesses and
innovative technologies, we have identified a need to restructure certain of our
businesses commencing in the fourth quarter of 2004. This restructuring will
involve the integration of duplicate facilities, abandonment of a major
facility, rationalization of personnel and certain other actions. Further
limiting our acquisitions strategy is the seventh amendment to our credit
facility with LaSalle Business Credit, LLC (see Note 8 to the consolidated
financial statements). This amendment includes, among other covenants, a
prohibition on further acquisitions and conditions to the payment of
contractually obligated earn-out payments. Notwithstanding these conditions in
our credit facility and our immediate term focus on restructuring certain of the
businesses within the United States, we remain committed to our acquisition
strategy. We plan to achieve this objective by broadening our network through a
combination of synergistic acquisitions (assuming we are allowed to under a
replacement credit facility, if available) and the organic expansion of our
existing base of operations. Once resumed, the focus of this strategy will be 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 in 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
23
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.
Gross revenue represents the total dollar value of services we sell to
our customers. Our cost of transportation includes direct costs of
transportation, including motor carrier, air, ocean and rail services. We act
principally as the service provider to add value in the execution and
procurement of these services to our customers. Our net transportation revenue
(gross transportation revenue less the direct cost of transportation) is the
primary indicator of our ability to source, add value and resell services
provided by third parties, and is considered by management to be a key
performance measure. Management believes that net revenue is also an important
measure of economic performance. Net revenue includes transportation revenue and
our fee-based activities, after giving effect to the cost of purchased
transportation. In addition, management believes measuring operating costs as a
function of net revenue provides a useful metric as our ability to control costs
as a function of net revenue directly impacts operating earnings. With respect
to our services other than freight transportation, net revenue is identical to
gross revenue as the principal costs for these services are payroll and facility
costs.
Our operating results will be affected as acquisitions occur. Since all
acquisitions are made using the purchase method of accounting for business
combinations, our financial statements will only include the results of
operations and cash flows of acquired companies for periods subsequent to the
date of acquisition. Accordingly, our results of operations only reflect the
operations of: Air Plus for periods subsequent to October 5, 2001; SLIS
(formerly known as Global) for periods subsequent to April 4, 2002; United
American for periods subsequent to May 30, 2002; TSI for periods subsequent to
October 1, 2002; TRWL for periods subsequent to January 31, 2003; Regroup for
periods subsequent to June 20, 2003; and CSI for periods subsequent to July 16,
2003. Starting in the second half of 2003, we began a program to establish an
offshore network of owned offices with an initial focus in Asia commencing with
the acquisition of G-Link's Singapore and Cambodia operations on August 8, 2003.
To help facilitate the consolidation, analysis and public reporting process, our
offshore operations are included within our consolidated results on a one-month
lag, or more specifically, our calendar year results will include results from
offshore operations for the period December 1 though November 30. As a result,
our 2003 results include the financial results for the G-Link Cambodia and
Singapore operations for the period August 8, 2003 through November 30, 2003. We
also closed a number of small transactions in December of 2003, the earnings
impact of which will not be reflected in our results until 2004.
Our GAAP based net income will also be affected by non-cash charges
relating to the amortization of customer related intangible assets and other
intangible assets arising from our completed acquisitions. Under applicable
accounting standards, purchasers are required to allocate the total
consideration in a business combination to the identified assets acquired and
liabilities assumed based on their fair values at the time of acquisition. The
excess of the consideration paid over the fair value of the identifiable net
assets acquired is to be allocated to goodwill, which is tested at least
annually for impairment. Applicable accounting standards require the Company to
separately account for and value certain identifiable intangible assets based on
the unique facts and circumstances of each acquisition. As a result of the
Company's acquisition strategy, our net income will include material non-cash
charges relating to the amortization of customer related intangible assets and
other intangible assets acquired in our acquisitions. Although these charges may
increase as the Company completes more acquisitions, we believe we are actually
growing the value of our intangible assets (e.g., customer relationships). Thus,
we believe that earnings before interest, taxes, depreciation and amortization,
or EBITDA, is a useful financial measure for investors because it eliminates the
effect of these non-cash costs and provides an important metric of the economic
reality of the business. Accordingly, we employ EBITDA as a measure of our
historical financial performance and as a benchmark for future guidance.
A significant portion of our revenue is derived from our international
operations, and the growth of those operations is an important part of our
business strategy. Our current international operations are focused on the
shipment of goods into and out of the United States and are dependent on the
volume of international trade with the United States. Our strategic plan
contemplates the growth of those operations, as well as the expansion into the
24
transportation of goods wholly outside of the United States. A list of the
factors that could adversely affect our current international operations has
been included in Item 1 of this Annual Report on Form 10-K/A, under the heading
"Risks Particular to our Business."
Our operating results are also subject to seasonal trends when measured
on a quarterly basis. Our first and second quarters are likely to be weaker as
compared with our other fiscal quarters, which we believe is consistent with the
operating results of other supply chain service providers. This trend is
dependent on numerous factors, including the markets in which we operate,
holiday seasons, consumer demand and economic conditions. Since our revenue is
largely derived from customers whose shipments are dependent upon consumer
demand and just-in-time production schedules, the timing of our revenue is often
beyond our control. Factors such as shifting demand for retail goods and/or
manufacturing production delays could unexpectedly affect the timing of our
revenue. As we increase the scale of our operations, seasonal trends in one area
may be offset to an extent by opposite trends in another area. We cannot
accurately predict the timing of these factors, nor can we accurately estimate
the impact of any particular factor, and thus we can give no assurance that
historical seasonal patterns will continue in future periods.
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
2 to the consolidated financial statements, areas that are particularly
significant include revenue recognition, costs of purchased transportation,
accounting for stock options, 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.
The Company derives its revenue 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 revenue by purchasing transportation services from
direct (asset-based) carriers and using those services to provide to its
customers transportation of property for compensation. 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. Based on the terms in the contract of carriage, revenue related to
shipments where the Company issues a house bill of lading is recognized when the
freight is delivered to the direct carrier at origin. Costs related to the
shipment are also recognized at this same time. Most transportation costs are
estimated at the time of shipment and such estimates are updated for differences
between estimated and actual amounts at the time invoices are processed for
payment. Our revised processes for domestic purchased transportation costs
require the assessment of the adequacy of the recorded estimates. All other
revenue, including revenue for customs brokerage and warehousing and other value
added services, is recognized upon completion of the service.
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, both basic and diluted loss per share would
have increased by $0.07 in 2003.
25
As discussed in Note 2 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 Statement
of Financial Accounting Standards (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 long-lived assets to be
held and used (including our identifiable intangible assets) is measured by
comparing the carrying amount of the asset to the future net undiscounted cash
flows expected to be generated by the asset. In developing our future cash flow
estimates, we incorporate assumptions that marketplace participants would use in
their estimates, including, among other things, that (i) existing operations are
evaluated on a stand-alone basis and, as such, achieve no revenue or cost
synergies, (ii) no further acquisitions are made, (iii) formerly acquired
companies achieve their earnings targets and their earn-outs are fully paid,
(iv) future earnings are fully taxed and (v) no additional equity is raised. 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.
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 approximately $24.9
million in NOLs may be available to offset future federal taxable income. Under
SFAS No. 109, Accounting for Income Taxes, we are required to provide a
valuation allowance to offset 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. At December 31, 2003, the valuation allowance was $16.0
million. Given our historical losses and our limited track record to date, we
maintained a full valuation allowance against our deferred tax assets as of
December 31, 2003. We had deferred tax liabilities of $1.0 million at December
31, 2003 and approximately $0.5 million at December 31, 2002, primarily related
to the tax amortization of goodwill, which is deductible for tax purposes over a
life of 15 years but is not amortized for book purposes. We do not anticipate
paying federal income taxes in the near future as we expect that our existing
NOLs will be sufficient to offset current taxable income, if any. However,
additional sales of our securities could have the effect of significantly
limiting our ability to utilize our existing NOLs in the future.
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.
26
RESULTS OF OPERATIONS
Year ended December 31, 2003 compared to year ended December 31, 2002
The following table summarizes our total revenue, net transportation
revenue and other revenue (in thousands):
CHANGE
RESTATED RESTATED --------------------
2003 2002 AMOUNT PERCENT
---------- ---------- ---------- -------
Total revenue $ 220,084 $ 122,788 $ 97,296 79.2%
========== ========== ==========
Transportation revenue $ 203,187 $ 113,510 $ 89,677 79.0
Cost of transportation 158,106 86,085 72,021 83.7
---------- ---------- ----------
Net transportation revenue 45,081 27,425 17,656 64.4
Net transportation margin 22.2% 24.2%
Customs brokerage 10,027 6,290 3,737 59.4
Warehousing and other
value added services 6,870 2,988 3,882 129.9
---------- ---------- ----------
Net revenue $ 61,978 $ 36,703 $ 25,275 68.9
========== ========== ==========
Net revenue margin 28.2% 29.9%
========== ==========
Total revenue was $220.1 million for the year ended December 31, 2003,
an increase of $97.3 million or 79.2% over total revenue of $122.8 million for
the comparable period in 2002. $17.1 million or 17.6% of the increase in total
revenue was attributable to the operations of the businesses we acquired in
2003; $24.3 million or 25.0% was due to an increase in Air Plus' revenue ("same
store growth"); and the remaining $55.9 million or 57.4% of the increase was
attributable to operations acquired or launched as new operations over the
course of 2002 which included the SLIS and United American acquisitions as well
as the newly opened office in Hong Kong.
Net transportation revenue was $45.1 million for the year ended December
31, 2003, an increase of $17.7 million or 64.4% over net transportation revenue
of $27.4 million for the comparable period in 2002. $3.8 million or 21.5% of the
increase in net transportation revenue was attributable to the operations of the
businesses we acquired in 2003; $5.1 million or 28.8% was due to same store
growth; and the remaining $8.8 million or 49.7% of the increase was attributable
to operations acquired or launched as new operations over the course of 2002
which included the SLIS and United American acquisitions as well as the newly
opened office in Hong Kong.
Net transportation margin decreased to 22.2% for the year ended December
31, 2003 from 24.2% for the comparable period in 2002. This decrease in net
transportation margin is primarily the result of the addition in the second
quarter of 2002 of our International Services platform, which traditionally has
lower margins, and its expansion through our 2003 acquisitions of CSI and G-Link
Singapore and Cambodia. Net transportation margin for the International Services
platform, while still reducing the consolidated net transportation margin, did
increase to 14.9% for the year ended December 31, 2003 from 13.9% for the
comparable period in 2002 driven primarily by increased capacity purchasing
power at our emerging Hong Kong facility. Net transportation margin for the
Domestic Services platform decreased to 26.9% for the year ended December 31,
2003 from 29.2% for the comparable period in 2002 driven primarily by one low
margin piece of business that the Company ultimately exited in 2004.
Customs brokerage and other value added services revenue was $16.9
million for the year ended December 31, 2003, an increase of $7.6 million over
customs brokerage and other value added services revenue of $9.3 million in
27
the comparable period of 2002. $3.1 million or 40.8% of the increase was
attributable to same store growth; $0.3 million or 3.9% of the increase was
attributable to operations of the businesses we acquired in 2003; and the
remaining $4.2 million or 55.3% of the increase was attributable to operations
acquired or launched as new operations over the course of 2002, which included
the SLIS and United American acquisitions as well as the newly opened office in
Hong Kong.
Net revenue was $62.0 million for the year ended December 31, 2003, an
increase of $25.3 million or 68.9% over net revenue of $36.7 million for the
comparable period in 2002. $4.1 million or 16.2% of the increase in net revenue
was attributable to the operations of the businesses we acquired in 2003; $8.3
million or 32.8% was due to same store growth; and the remaining $12.9 million
or 51.0% of the increase was attributable to an incremental quarter of SLIS and
United American results and an incremental three quarters of Hong Kong results
in 2003 over 2002.
Net revenue margin decreased to 28.2% for 2003 compared to 29.9% for
2002. This decrease in net revenue margin is primarily the result of the
addition in the second quarter of 2002 of our International Services platform,
which traditionally has lower margins, and its expansion through our 2003
acquisitions of CSI and G-Link Singapore and Cambodia. Net revenue margin for
the International Services platform decreased to 25.8% for the year ended
December 31, 2003 from 27.5% for the comparable period in 2002. Net revenue
margin for the Domestic Services platform decreased to 29.8% for the year ended
December 31, 2003 from 31.2% for the comparable period in 2002 driven primarily
by one low margin piece of business that the Company ultimately exited in 2004.
The following table summarizes certain historical consolidated statement
of operations data as a percentage of our net revenue (in thousands):
RESTATED RESTATED
2003 2002 CHANGE
-------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- ------- ---------- -------
Net revenue $ 61,978 100.0% $ 36,703 100.0% $ 25,275 68.9%
---------- ------- ---------- ------- ----------
Personnel costs 31,888 51.5 19,089 52.0 12,799 67.0
Other selling, general and
administrative costs 24,583 39.7 14,680 40.0 9,903 67.5
Depreciation and amortization 2,660 4.3 2,187 6.0 473 21.6
Litigation settlement and nonrecurring
costs 1,169 1.8 -- -- 1,169 NM
---------- ------- ---------- ------- ----------
Total operating costs 60,300 97.3 35,956 98.0 24,344 67.7
---------- ------- ---------- ------- ----------
Income from operations 1,678 2.7 747 2.0 931 124.6
Provisions for excess earn-out
payments (1,270) (2.1) -- -- (1,270) NM
Interest income 49 0.1 91 0.3 (42) (46.2)
Interest expense (142) (0.2) -- -- (142) NM
Other income (expense), net 85 0.1 37 0.1 48 129.7
---------- ------- ---------- ------- ----------
Income from continuing operations
before income taxes and minority
interest 400 0.6 875 2.4 (475) (54.3)
Income tax expense 736 1.2 421 1.2 315 74.8
---------- ------- ---------- ------- ----------
Income (loss) from continuing operations
before minority interest (336) (0.6) 454 1.2 (790) NM
Minority interest 187 0.3 -- -- 187 NM
---------- ------- ---------- ------- ----------
Income (loss) from continuing operations (523) (0.9) 454 1.2 (977) NM
Loss from discontinued operations (263) (0.4) -- -- (263) NM
---------- ------- ---------- ------- ----------
Net income (loss) (786) (1.3) 454 1.2 (1,240) NM
Preferred stock dividends -- -- 15,020 40.9 (15,020) (100.0)
---------- ------- ---------- ------- ----------
Net income (loss) attributable to common
stockholders $ (786) (1.3)% $ 15,474 42.1% $ (16,260) NM
========== ======= ========== ======= ==========
28
Personnel costs were $31.9 million for the year ended December 31, 2003,
an increase of $12.8 million or 67.0% over personnel costs of $19.1 million for
the comparable period in 2002. $1.4 million or 10.9% of the increase in
personnel costs was attributable to the operations of the businesses we acquired
in 2003; $4.2 million or 32.8% was due to same store growth; and $7.2 million or
56.3% of the increase was attributable to operations acquired or launched as new
operations over the course of 2002 which included the SLIS and United American
acquisitions as well as the newly opened office in Hong Kong. Personnel costs as
a percentage of net revenue decreased to 51.5% from 52.0% year over year.
The number of employees increased to 827 at December 31, 2003 from 510
at December 31, 2002, an increase of 317 employees or 62.2%. Of the total number
of employees, 622 or 75.2% of the employees are engaged in operations; 57 or
6.9% of the employees are engaged in sales and marketing; and 148 or 17.9% of
the employees are engaged in finance, administration, and management functions.
Additionally, approximately 185 or 58.4% of the total increase in employees was
attributable to acquisitions, while approximately 130 employees or 41.6% were
added to meet the demands of the increase in our business in 2003.
Other selling, general and administrative costs were $24.6 million for
the year ended December 31, 2003, an increase of $9.9 million or 67.5% over
other selling, general and administrative costs of $14.7 million for the
comparable period in 2002. $1.7 million or 17.2% of the increase was
attributable to the operations of the businesses we acquired in 2003; $5.3
million or 53.5% was due to same store growth; and $2.9 million or 29.3% of the
increase was attributable to operations acquired or launched as new operations
over the course of 2002 which included the SLIS and United American acquisitions
as well as the newly opened office in Hong Kong. As a percentage of net revenue,
other selling general and administrative costs decreased to 39.7% from 40.0%
year over year.
Depreciation and amortization amounted to $2.7 million for the year
ended December 31, 2003, an increase of $0.5 million or 21.6% over the
comparable period in 2002 principally due to amortization of acquired intangible
assets acquired in the Regroup and G-Link transactions. See Note 5 to the
Company's consolidated financial statements.
Litigation and nonrecurring costs were $1.2 million for the year ended
December 31, 2003 and are comprised of $0.8 million paid to settle litigation
commenced against the Company in August 2000 in a combination of $0.4 million in
cash and $0.4 million in Company stock, and $0.4 million associated with the SEC
review and delayed effectiveness of a registration statement filed in connection
with a March 2003 private placement.
Income from operations was $1.7 million in 2003, compared to $0.7
million for 2002.
Provisions for excess earn-out payments represent the amount paid to
former owners of acquired businesses that, as a result of the restatement of our
financial performance for 2003, was in fact in excess of the amount that would
have been paid out based on the restated financial results for 2003. Due to the
uncertainty of collecting the excess payments, the Company has determined that
the resulting receivable from the former owners should be fully reserved for. If
excess amounts paid are recovered in the future, those proceeds would be
reflected as other income in the Company's statement of operations.
29
Interest income was nominal for the year ended December 31, 2003
compared to interest income of $0.1 million for the comparable prior year
period. With year over year cash balances being reduced as a result of our
acquisition program, interest income remained an insignificant component of the
Company's overall financial performance for the year.
Interest expense was $0.1 million for the year ended December 31, 2003
compared to no interest expense in the comparable prior year period driven by
advances on our revolving credit facility used to fund acquisitions and working
capital during 2003.
Income from continuing operations before income taxes and minority
interest was $0.4 million in 2003 compared to $0.9 million in 2002.
As a result of historical losses related to investments in early-stage
technology businesses, the Company has accumulated federal NOLs. The Company has
approximately $24.9 million of NOLs as of December 31, 2003 to offset future
federal taxable income. The Company does not anticipate paying significant
federal income taxes in the near future because it expects that the NOLs will be
sufficient to offset substantially all of its federal income tax liability, if
any. In addition to minor state and foreign income taxes, the Company recorded
deferred income taxes amounting to $0.6 million and $0.4 million for
the years ended December 31, 2003 and 2002, respectively, primarily related to
amortization of goodwill for income tax purposes. This provision will increase
as the goodwill related to the Company's U.S.-based operations is amortized over
its tax life of fifteen years.
Loss from continuing operations before minority interest was $0.3
million in 2003, compared to income of $0.5 million in 2002.
Minority interest for the year ended December 31, 2003 was $0.2 million
and was primarily related to the G-Link operations, acquired in August 2003, of
which the Company owns a 70% interest.
The losses from discontinued operations in 2003 reflect the costs
associated with the remaining lease liability of a property used in the
Company's former internet business, as well as a payment made to a consultant
for services provided in 2000.
Net loss was $0.8 million in 2003, compared to net income of $0.5
million in 2002.
In 2002, 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. See Note 12 to the
consolidated financial statements.
Net loss attributable to common stockholders was $0.8 million in 2003,
compared to net income attributable to common stockholders of $15.5 million in
2002. Basic loss per share was $0.03 for 2003 compared to earnings per share of
$0.70 for 2002. Diluted loss per share was $0.03 for 2003 compared to earnings
per share of $0.02 for 2002. Diluted earnings per share for 2002 excludes the
net effect of the Series C exchange transaction.
30
Year ended December 31, 2002 compared to year ended December 31, 2001
The following table summarizes our total revenue, net transportation
revenue and other revenue (in thousands):
CHANGE
RESTATED RESTATED --------------------
2002 2001 AMOUNT PERCENT
---------- ---------- ---------- -------
Total revenue $ 122,788 $ 15,598 $ 107,190 687.2%
========== ========== ==========
Transportation revenue $ 113,510 $ 15,174 $ 98,336 648.1
Cost of transportation 86,085 10,009 76,076 760.1
---------- ---------- ----------
Net transportation revenue 27,425 5,165 22,260 431.0
Net transportation margin 24.2% 34.0%
Customs brokerage 6,290 -- 6,290 NM
Warehousing and other
value added services 2,988 424 2,564 604.7
---------- ---------- ----------
Net revenue $ 36,703 $ 5,589 $ 31,114 556.7
========== ========== ==========
Net revenue margin 29.9% 35.8%
========== ==========
Total revenue was $122.8 million for the year ended December 31, 2002,
an increase of $107.2 million or 687.2% over total revenue of $15.6 million for
the comparable period in 2001. $56.8 million or 53.0% of the increase in total
revenue was attributable to the operations of the businesses we acquired in
2002; $5.6 million or 5.2% was due to an increase in Air Plus' revenue for the
fourth quarter of 2002 over the comparable period in 2001 ("same store growth");
and the remaining $44.8 million or 41.8% of the increase was attributable to an
incremental three quarters of Air Plus' operations in 2002 over 2001.
Net transportation revenue was $27.4 million for the year ended December
31, 2002, an increase of $22.3 million or 431.0% over net transportation revenue
of $5.2 million for the comparable period in 2001. $8.1 million or 36.5% of the
increase in net transportation revenue was attributable to acquisitions; $1.6
million or 7.2% was due to same store growth; and the remaining $12.6 million or
56.3% of the increase was attributable to an incremental three quarters of Air
Plus' operations in 2002 over 2001.
Net transportation margin decreased to 24.2% for the year ended December
31, 2002 from 34.0% for the comparable period in 2001. This decrease in net
transportation margin is primarily the result of the addition in the second
quarter of 2002 of our International Services platform, which has a large ocean
freight component that traditionally has lower margins. Net transportation
margin for our International Services platform was 13.9% for the year ended
December 31, 2002. In comparison, net transportation margin for our Domestic
Services platform was 29.2% for the year ended December 31, 2002.
Customs brokerage and other value added services revenue was $9.3
million for the year ended December 31, 2002 compared to $0.4 million for the
comparable prior year period. This increase was driven primarily by the second
quarter of 2002 acquisition of SLIS, which has a significant customs brokerage
operation.
Net revenue was $36.7 million for the year ended December 31, 2002, an
increase of $31.1 million or 556.7% over net revenue of $5.6 million for the
comparable period in 2001. $15.1 million or 48.6% of the increase in net revenue
was attributable to the operations of the businesses we acquired in 2002; $1.7
million or 5.5% was due to same store growth; and the remaining $14.3 million or
45.9% of the increase was attributable to an incremental three quarters of Air
Plus' operations in 2002 over 2001.
31
Net revenue margin decreased to 29.9% for 2002 compared to 35.8% for
2001 driven primarily by the addition of our International Services platform in
the second quarter of 2002. Net revenue margin in the International Services
platform was 27.5% in 2002. In comparison, net revenue margin for our Domestic
Services platform was 31.2% in 2002.
The following table summarizes certain consolidated statement of
operations data as a percentage of our net revenue (in thousands):
RESTATED RESTATED
2002 2001 CHANGE
-------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- ------- ---------- -------
Net revenue $ 36,703 100.0% $ 5,589 100.0% $ 31,114 556.7%
---------- ------- ---------- ------- ----------
Personnel costs 19,089 52.0 5,997 107.3 13,092 218.3
Other selling, general and administrative
costs 14,680 40.0 3,917 70.1 10,763 274.8
Depreciation and amortization 2,187 6.0 495 8.8 1,692 341.8
---------- ------- ---------- ------- ----------
Total operating costs 35,956 98.0 10,409 186.2 25,547 245.4
---------- ------- ---------- ------- ----------
Income (loss) from operations 747 2.0 (4,820) (86.2) 5,567 NM
Interest income 91 0.3 1,286 23.0 (1,195) (92.9)
Interest expense -- -- (4) (0.1) 4 100.0
Other income (expense), net 37 0.1 13 0.2 24 184.6
---------- ------- ---------- ------- ----------
Income (loss) from continuing operations
before income taxes 875 2.4 (3,525) (63.1) 4,400 NM
Income taxes 421 1.2 71 1.3 350 493.0
---------- ------- ---------- ------- ----------
Income (loss) from continuing operations 454 1.2 (3,596) (64.4) 4,050 NM
Loss from discontinued operations -- -- (13,863) (248.0) 13,863 100.0
---------- ------- ---------- ------- ----------
Net income (loss) 454 1.2 (17,459) (312.4) 17,913 NM
Preferred stock dividends 15,020 40.9 (4,151) (74.3) 19,171 NM
---------- ------- ---------- ------- ----------
Net income (loss) attributable to common
stockholders $ 15,474 42.1% $ (21,610) (386.7)% $ 37,084 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. $8.0 million or 61.1% of the increase in
personnel costs was attributable to the operations of the businesses we acquired
in 2002; $0.7 million or 5.3% was due to organic growth; and the remaining $4.4
million or 33.6% of the increase was attributable to an incremental three
quarters of Air Plus' operations in 2002 over 2001. Personnel costs as a
percentage of net revenue decreased to 52.0% from 107.3% year over year.
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,
203 or 69.9% of the total increase in employees was
32
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. $3.6 million or 33.3% of the increase was
attributable to the operations of the businesses we acquired in 2002; $1.1
million or 10.2% was due to organic growth; and the remaining $6.1 million or
56.5% of the increase was attributable to an incremental three quarters of Air
Plus' operations in 2002 over 2001. As a percentage of net revenue, other
selling general and administrative costs decreased to 40.0% from 70.1% year over
year.
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 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.
Income from operations was $0.7 million in 2002, compared to a loss of
$4.8 million for 2001.
Other income and net interest income totaled $0.1 million in 2002, a
decrease from $1.3 million in 2001. Lower cash balances in 2002 compared to 2001
resulted in lower interest income in 2002 compared to 2001.
As a result of historical losses related to investments in early-stage
technology businesses, the Company has accumulated federal NOLs which were
offset by a tax valuation allowance. As a result, the Company does not
anticipate paying any significant federal or state income taxes in the near
future. Besides minor state and foreign income tax provisions in 2002, the
Company provided approximately $0.4 million in federal and state deferred taxes
which arose from the amortization of goodwill for income tax purposes. There was
a provision for income taxes of $0.1 million in 2001 for deferred income taxes.
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 under our previous business model, including investment losses,
personnel and office costs.
Net income was $0.5 million in 2002, compared to a net loss of $17.5
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 $15.5 million in
2002, compared to a net loss attributable to common stockholders of $21.6
million in 2001. Basic earnings per share was $0.70 for 2002 compared to a loss
of $1.06 per basic share for 2001. Diluted earnings per share for 2002 excludes
the net effect of the Series C exchange transaction and was $0.02 per diluted
share for 2002 compared to a loss of $1.06 per diluted share for 2001.
33
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, 2003 (in thousands):
LESS THAN MORE THAN
Contractual Obligations 1 YEAR 1 - 3 YEARS 3 - 5 YEARS 5 YEARS TOTAL
-------------------------------------------- ---------- ----------- ---------- ---------- ----------
Operating lease obligations $ 5,977 $ 9,015 $ 4,336 $ 1,151 $ 20,479
Capital lease obligations 671 1,135 -- -- 1,806
Other long-term liabilities reflected on the
Company's balance sheet under GAAP (a) 3,548 -- -- -- 3,548
Letter of credit 160 -- -- -- 160
---------- ----------- ---------- ---------- ----------
Total contractual obligations 10,356 10,150 4,336 1,151 25,993
Contingent earn-out obligations (b) (c) (d) -- 22,698 9,618 909 33,225
---------- ----------- ---------- ---------- ----------
Total contractual and contingent obligations $ 10,356 $ 32,848 $ 13,954 $ 2,060 $ 59,218
========== =========== ========== ========== ==========
(a) Consists of earn-out payments that are due in 2004 to the former owners
of certain 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.
(c) Excludes $2.5 million contingent purchase price payable to the former
members of Regroup in the third quarter of 2004 subject to the acquired
operations achieving a $3.5 million earnings target for the twelve-month
period commencing July 1, 2003.
(d) During the 2003-2008 earn-out period, there is an additional contingent
obligation related to tier-two earn-outs that could be as much as $18.0
million if certain of the acquired companies generate an incremental
$37.0 million in pre-tax earnings.
FINANCIAL OUTLOOK
Based upon our operating results through the first nine months of 2004,
we believe that gross revenues will be approximately $340 million in 2004 and
$375 million in 2005. Due to a number of factors, including the restated
financial performance of our Domestic Services operations, the Company's intent
to restructure its operations to realize synergies as part of the Company's
overall acquisition strategy and future efforts to realize efficiencies from a
newly developed operating system, we are not able to provide guidance at this
time about expected future performance beyond gross revenues.
The restructuring initiative will include the rationalization of
facilities and personnel within the U.S. Some of these initiatives have been
defined but much remains to be defined and implemented. This initiative will
result in a material charge which will negatively impact the Company's financial
results in the fourth quarter of 2004. We will provide guidance in the future,
but only after our plan is fully implemented and the newly streamlined
operations have been functioning for a reasonable period of time. This
moratorium on financial performance guidance will be in effect for 2005 and
perhaps beyond next year. All previously issued financial guidance did not
reflect the impact of the restatement or restructuring discussed above, nor was
management aware of the issues giving rise to the restatement at the time that
the previously issued guidance was provided. For these reasons, previously
issued guidance relative to operating results for 2004 and 2005 is hereby
withdrawn.
34
SOURCES OF GROWTH
Management believes that a comparison of "same store" growth is critical
in the evaluation of the quality and extent of the Company's internally
generated growth. This "same store" analysis isolates the financial
contributions from operations that have been included in the Company's operating
results for the full comparable prior year period. The table below presents
"same store" comparisons for the year ended December 31, 2003 (which is the
measure of any increase from the same period of 2002).
FOR THE YEAR ENDED
DECEMBER 31, 2003
------------------
Domestic 36.9%
International N/A
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $3.1 million and $2.3 million as of
December 31, 2003 and 2002. Working capital totaled $13.1 million and $4.7
million at December 31, 2003 and 2002.
Cash used in operating activities was $4.0 million for 2003 compared to
$0.6 million used in 2002, which included an increase of $8.4 million in working
capital.
Net cash used in investing activities was $15.9 million in 2003 compared
to $12.5 million in 2002. Investing activities were driven principally by the
acquisition of new businesses. We deployed $9.4 million for the acquisition of
new businesses in 2003 compared to $10.5 million in 2002 and $3.2 million in
support of our web-based operating platform, Tech-Logis(TM), in 2003 compared to
$0.2 million in 2002. In addition, we funded $2.2 million in earn-out payments
in 2003.
Cash from financing activities generated $20.7 million in 2003 compared
to cash provided by financing activities of $0.2 million in 2002, with the
majority of the increase due to the Company's two private placements of equity.
We paid $6.6 million in cash for earn-outs on or around April 1, 2004
based on the 2003 performance of certain of our acquired companies relative to
their respective pre-tax earnings targets that we believed to be accurate at the
time of the payments. Based on restated financial results for the year ended
December 31, 2003, we have determined that amounts were paid in excess of
amounts due by approximately $3.1 million. These excess earn-out payments will
be taken as a charge against earnings in the first quarter of 2004. We will
attempt to recover the excess amounts paid from the former owners of the
acquired businesses. Any amounts we recover will result in the recognition of
non-operating income in the period recovered.
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 would
convert into 3,607,420 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 held a limited liquidation
preference which expired at the end of 2003. In addition, the holders of the
Series D preferred stock were restricted from selling the common stock received
upon conversion of the Series D preferred stock until July 19, 2003 and are now
permitted limited resale based on trading volume through July 19, 2004. At March
1, 2004 there were 309,397 shares of the Series D preferred stock outstanding.
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 $5.5 million for the Company, after the
payment of placement agent fees and other out-of-pocket costs associated with
the placement.
35
On October 16, 2003, we completed the private placement of 5,983,500
shares of our common stock at a price of $2.20 per share. In connection with
this transaction, we realized gross proceeds of $13.2 million and paid a
brokerage fee of four (4%) percent, or $0.5 million.
We may receive proceeds in the future from the exercise of warrants and
options outstanding as of March 1, 2004 in accordance with the following
schedule:
NUMBER OF
SHARES PROCEEDS
------------ ------------
Options outstanding under our stock option plan 10,313,634 $ 15,522,126
Non-plan options 1,326,700 2,774,250
Warrants 1,487,563 1,547,573
------------ ------------
Total 13,127,897 $ 19,843,949
============ ============
We believe that our current working capital, our anticipated cash flow
from operations and our existing credit facility are adequate to support our
existing operations. However, we will need to replace our existing credit
facility and obtain additional financing to pursue our acquisition strategy. We
intend to finance these acquisitions primarily through the use of cash, funds
from a new debt facility, if available, 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 provide for near-term liquidity, we maintain a revolving credit
facility (the "U.S. Facility") with LaSalle Business Credit, LLC that is
collateralized by accounts receivable and other assets of the Company and its
subsidiaries. The U.S. Facility is collateralized by accounts receivable and
other assets of the Company and its subsidiaries. The U.S. Facility requires the
Company and its U.S. subsidiaries to comply with certain financial covenants.
Advances under the U.S. Facility are available to fund future working capital
and other corporate purposes. Effective November 17, 2004, we amended the U.S.
Facility. The amendment provides for, among other things, (a) a change in the
term of the facility from the existing expiration date of May 15, 2007 to
January 31, 2006, (b) a prohibition on further acquisitions by the Company, (c)
a change in the interest rate from LIBOR plus 200 basis points to prime rate
plus 200 basis points, (d) a reduction in the facility borrowing limit from
$25.0 million to $22.5 million, (e) increases in various fee, (f) a prohibition
on loans to, or investments in the Company's foreign subsidiaries, (g) EBITDA
targets on a cumulative quarterly basis for the Company and certain subsidiaries
and (h) conditions to the ability of the Company to make earn-out payments with
respect to its acquired U.S. based operations. As of January 31, 2005, we had
advances of $13.9 million and we had eligible accounts receivable sufficient to
support $17.4 million in borrowings from our U.S. Facility. This U.S. Facility
also included a $5.0 million bridge loan facility available to the Company at
the rate of prime plus 2.0%. The Company borrowed the full $5.0 million
available for the bridge loan facility on August 24, 2004 and subsequently
repaid the bridge loan facility in full on November 26, 2004.
Effective October 27, 2004, Stonepath Holdings (Hong Kong) Limited
("Asia Holdings") entered into a $10.0 million term credit facility with Hong
Kong League Central Credit Union (the "Asia Facility") collateralized by the
accounts receivable of the Company's Hong Kong and Singapore operations and an
unsecured subordinated guarantee from Stonepath Group, Inc. The Asia Facility
carries a term of one year and an interest rate of 15.0% for amounts outstanding
thereunder. On November 4, 2004, Asia Holdings borrowed $3.0 million under the
Asia Facility.
Below are descriptions of material acquisitions made since 2001
including a breakdown of consideration paid at closing and future potential
earn-out payments. We define "material acquisitions" as those with aggregate
potential consideration of $5.0 million or more.
36
On October 5, 2001, we acquired Air Plus, a group of Minneapolis-based
privately held companies that provide a full range of logistics and
transportation services. The total value of the transaction was $34.5 million,
consisting of cash of $17.5 million paid at closing and a four-year earn-out
arrangement of $17.0 million. In the earn-out, 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 increased costs of purchased transportation as a result of the
restatement and the Company's interpretation of the underlying purchase
agreement language, the cumulative adjusted earnings for Air Plus from date of
acquisition through December 31, 2003 is $8.1 million compared to the previously
calculated amount of $12.7 million. As a result, the Company believes that it
has paid approximately $3.9 million to selling shareholders in excess of amounts
that should have been paid. As a consequence of these restatements, the amounts
paid in 2003 in excess of earn-out payments due have been reclassified from
goodwill to advances due from shareholders. The excess earn-out amounts
applicable to 2003 earnings were previously recorded as earn-out payable at
December 31, 2003. Such excess applicable to 2003 has been eliminated with a
corresponding reduction in goodwill. At December 31, 2003, the excess earn-out
payments related to the 2002 results of operations have been fully reserved for
because of differing interpretations, by the Company and selling shareholders,
of the earn-out provisions of the purchase agreement. However, the Company will
seek the refund of such excess payments.
On April 4, 2002, we acquired SLIS (f/k/a Global Transportation
Services, Inc.), 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 in base earn-out payments
payable 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. We
also provided the former Global shareholders with an additional incentive to
generate earnings in excess of the base $2.0 million annual earnings target
("Global's tier-two earn-out"). Under Global's tier-two earn-out, the 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 2003 performance, the former Global shareholders
received $1.0 million on April 1, 2004. On a cumulative basis, Global has
generated $9.3 million in adjusted earnings, providing its former shareholders
with a total of $1.8 million in cash earn-out payments and excess earnings of
$5.8 million to carryforward and apply 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 was valued at up to $16.1 million,
consisting of cash of $5.1 million paid at closing and a four-year earn-out
arrangement based upon the future financial performance of United American. We
agreed to pay the former United American shareholder a total of $5.0 million in
base earn-out payments payable 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 an additional incentive to generate
earnings in excess of the base $2.2 million annual earnings target ("United
American's tier-two earn-out"). Under United American's tier-two earn-out, the
former United American shareholder is also entitled to receive 50% of the
cumulative pre-tax earnings generated by a certain pre-acquisition customer in
excess of $8.8 million during the four-year earn-out period subject to a maximum
additional earn-out opportunity of $6.0 million. United American would need to
generate cumulative earnings of $20.8 million over the four-year earn-out period
to receive the full $11.0 million in contingent earn-out payments. Based upon
the increased costs of purchased transportation as a result of the restatement
and the Company's interpretation of the
37
underlying purchase agreement language, the cumulative adjusted earnings for
United American from the date of acquisition through December 31, 2003 is $1.7
million compared to the previously calculated amount of $2.4 million. The
Company believes that it has paid approximately $0.5 million to the selling
shareholder in excess of amounts due. As a consequence of these restatements,
the amounts paid in 2003 in excess of earn-out payments due have been
reclassified from goodwill to advances due from shareholders. The excess
earn-out amounts applicable to 2003 earnings were previously recorded as
earn-out payable at December 31, 2003. Such excess applicable to 2003 has been
eliminated with a corresponding reduction in goodwill. At December 31, 2003, the
excess earn-out payment related to the 2002 results of operations have been
fully reserved for because of differing interpretations, by the Company and the
selling shareholder, of the earn-out provisions of the purchase agreement.
However, the Company will seek the refund of such excess payment.
On June 20, 2003, through our indirect wholly owned subsidiary,
Stonepath Logistics Government Services, we acquired the business of Regroup, a
Virginia limited liability company. The Regroup transaction enhanced our
presence in the Washington, D.C. market and provided a platform to focus on the
logistics needs of U.S. government agencies and contractors. The transaction was
valued at up to $27.2 million, consisting of cash of $3.7 million and $1.0
million of Company stock paid at closing, and a five-year earn-out arrangement.
The Company agreed to pay the members of Regroup a total of $10.0 million in
base earn-out payments payable in equal installments of $2.5 million in 2005
through 2008, if Regroup achieves pre-tax income of $3.5 million in each of the
years preceding the year of payment. In the event there is a shortfall in
pre-tax income, the earn-out payment will be reduced on a dollar-for-dollar
basis. Shortfalls may be carried over or carried back to the extent that pre-tax
income in any other payout year exceeds the $3.5 million level. The Company also
agreed to pay the former members of Regroup an additional $2.5 million if
Regroup earned $3.5 million in pre-tax income during the 12-month period
commencing July 1, 2003, however no payment was required based on Regroup's
actual results. In addition, the Company has also provided the former members of
Regroup with an additional incentive to generate earnings in excess of the base
$3.5 million annual earnings target ("Regroup's tier-two earn-out"). Under
Regroup's tier-two earn-out, the former members of Regroup are also entitled to
receive 50% of the cumulative pre-tax earnings in excess of $17.5 million
generated during the five-year earn-out period subject to a maximum additional
earn-out opportunity of $10.0 million. Regroup would need to generate cumulative
earnings of $37.5 million over the five-year earn-out period in order for the
former members to receive the full $22.5 million in contingent earn-out
payments.
On August 8, 2003, through two indirect international subsidiaries, we
acquired a seventy (70%) percent interest in the assets and operations of the
Singapore and Cambodia based operations of the G-Link Group, which provide a
full range of international logistics services, including international air and
ocean transportation, to a worldwide customer base of manufacturers and
distributors. This transaction substantially increased our presence in Southeast
Asia and expanded our network of owned offices through which to deliver global
supply chain solutions. The transaction was valued at up to $6.2 million,
consisting of cash of $2.8 million, $0.9 million of the Company's common stock
paid at the closing and an additional $2.5 million payable over a four-year
earn-out period based upon the future financial performance of the acquired
operations. We agreed to pay $2.5 million in base earn-out payments payable in
installments of $0.3 million in 2004, $0.6 million in 2005 through 2006 and $1.0
million in 2007, with each installment payable in full if the acquired
operations achieve pre-tax income of $1.8 million in each of the years preceding
the year of payment (or the pro rata portion thereof in 2003 and 2006). In the
event there is a shortfall in pre-tax income, the earn-out payment will be
reduced on a dollar-for-dollar basis. Shortfalls may be carried over or carried
back to the extent that pre-tax income in any other payout year exceeds the $1.8
million level. As additional purchase price, the Company also agreed to pay
G-Link for excess net assets amounting to $1.5 million through the issuance of
Company common stock, on a post-closing basis. Based upon 2003 performance,
G-Link received $0.2 million on April 1, 2004.
On February 9, 2004, through a wholly-owned subsidiary, we acquired a
55% interest in Shanghai-based Shaanxi. Shaanxi provides a wide range of
customized transportation and logistics services and supply chain solutions. The
transaction is valued at up to $11.0 million, consisting of cash of $3.5 million
and $2.0 million of the Company's common stock paid at the closing, plus up to
an additional $5.5 million payable over a five-year period based upon the future
financial performance of Shaanxi. The earn-out payments are due in five
installments of $1.1 million beginning in 2005, with each installment payable in
full if Shaanxi achieves pre-tax income of at least $4.0 million in each of the
earn-out years. In the event there is a shortfall in pre-tax income, the
earn-out payment for that year will be reduced on a dollar-for-dollar basis by
the amount of the shortfall. Shortfalls may be carried over or back to the
extent that pre-tax income in any other payout year exceeds the $4.0 million
level. As additional
38
purchase price, on a post-closing basis the Company has agreed to pay Shaanxi
for 55% of its closing date working capital.
We may be required to make significant payments in the future if the
earn-out installments under our various acquisitions become due, subject to
limitation under the terms of our U.S. Facility. While we believe that a
significant portion of the required payments will be generated by the acquired
subsidiaries, we may have to secure additional sources of capital to fund some
portion of the earn-out payments as they become due. This presents us with
certain business risks relative to the availability and pricing of future fund
raising, as well as the potential dilution to our stockholders if the fund
raising involves the sale of equity.
The following table summarizes our maximum possible contingent base
earn-out payments for the years indicated based on results of the prior year as
if pre-tax earnings targets associated with each acquisition were achieved
although the Company does not expect the Domestic Services pre-tax earnings
levels to be fully achieved (in thousands)(1)(2)(3):
2005 2006 2007 2008 2009 TOTAL
-------- -------- -------- -------- -------- --------
Earn-out payments:
Domestic $ 9,040 $ 8,050 $ 2,500 $ 2,500 $ -- $ 22,090
International 2,804 2,804 3,176 1,442 909 11,135
-------- -------- -------- -------- -------- --------
Total earn-out
Payments $ 11,844 $ 10,854 $ 5,676 $ 3,942 $ 909 $ 33,225
======== ======== ======== ======== ======== ========
Prior year pre-tax
earnings targets (4)
Domestic $ 12,306 $ 12,306 $ 3,500 $ 3,500 $ -- $ 31,612
International 6,546 6,546 7,602 2,940 1,823 25,457
-------- -------- -------- -------- -------- --------
Total pre-tax
earnings targets $ 18,852 $ 18,852 $ 11,102 $ 6,440 $ 1,823 $ 57,069
======== ======== ======== ======== ======== ========
Earn-outs as a percentage
of prior year pre-tax
earnings targets:
Domestic 73.5% 65.4% 71.4% 71.4% -- 69.9%
International 42.8% 42.8% 41.8% 49.1% 49.9% 43.7%
Combined 62.8% 57.6% 51.1% 61.2% 49.9% 58.2%
----------
(1) Excludes the impact of prior year's pre-tax earnings carryforwards (excess
or shortfalls versus earnings targets).
(2) During the 2003-2008 earn-out period, there is an additional contingent
obligation related to tier-two earn-outs that could be as much as $18.0
million if certain of the acquired companies generate an incremental $37.0
million in pre-tax earnings.
(3) Only transactions closed as of December 31, 2003 are included in this
schedule.
(4) 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
assets 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
In January 2003 (and revised in December 2003), the FASB issued
Interpretation No. 46, Consolidation of Variable Interest Entities, which
provides new guidance with respect to the consolidation of certain previously
39
unconsolidated entities, including special purpose entities. The adoption of
Interpretation No. 46 in 2003 did not have a material impact on the Company's
consolidated financial statements.
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 interest incurred and our cash flows. 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. Our credit facility bears
interest at a variable rate. If market interest rates had changed by 100 basis
points, interest expense and our cash flows would have changed by approximately
$35,500 and $47,300, respectively. We do not invest in derivative financial
instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements as of December 31, 2003 and 2002
and for each of the years in the three-year period ended December 31, 2003 and
footnotes related thereto are included within Item 15(a) of this Report and may
be found at pages 62 through 93. The consolidated financial statements as of
December 31, 2003 and 2002 and for each of the years in the three-year period
ended December 31, 2003 have been restated. The restatement primarily relates to
correcting the accrual for purchased transportation and the resultant income tax
effects. In addition, the amounts owed as of December 31, 2003 and 2002 under
various earn-out provisions have been changed to reflect the impact of the
restatement. Schedule II - Valuation and Qualifying Accounts, may be found on
page 95.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Overview
In January 2004, the Company restated its 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, 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 was 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 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.
In connection with the preparation of the Company's June 30, 2004
consolidated financial statements, the Company's management determined that
Stonepath Logistics Domestic Services, Inc. ("SLDS") did not follow the
Company's designed disclosure controls and procedures to report a potential
weakness in the methodology used by SLDS to estimate its accrued cost of
purchased transportation. Based on its initial analysis at that time, the
Company recorded an immaterial increase to SLDS' cost of transportation in the
second quarter of 2004. The Company's management believes that the failure of
SLDS to follow the designed disclosure and control procedures in and of itself
constitutes a material weakness as defined under standards established by the
American Institute of Certified Public Accountants. The Company has implemented
changes in its estimating procedures and its processes for recognizing
differences between actual and estimated costs to assure the proper recognition
of purchased transportation costs.
On September 20, 2004, the Company announced, after having performed
some additional analysis, that it had understated its accrued purchase
transportation liability and related costs of purchased transportation for
previously reported periods as a result of an error discovered in the accounting
processes within certain subsidiary operations of the Domestic Services segment.
The Company determined that the process error did not accurately account for the
differences between the estimates and the actual freight costs incurred. This
allowed for an accumulation of previously unrecorded purchased transportation
costs to build up (such amounts should have been reflected as purchased
transportation costs). In
40
addition, the error resulted in the Company making earn-out payments to selling
shareholders in amounts greater than what otherwise would have been owed. The
Company believes that the presence of this error is indicative of a material
weakness in internal controls as defined under standards established by the
American Institute of Certified Public Accountants.
In the course of its review of the process error related to the under
accrual of purchased transportation, the Company also identified two additional
process errors related to revenue transactions within the Domestic Services
segment. At its Detroit location, the Company identified a billing error in
which the operating unit was invoicing one of its automotive customers at rates
which had been approved by a customer representative who did not have the
authority to do so. This customer billing error caused the Company to overstate
its revenues. At its Minneapolis location, the Company identified an accounting
error related to revenue recognition and depreciation that originated during the
second quarter of 2004. Upon billing to a customer for certain capital equipment
purchased in connection with the launch of a new distribution center for that
customer, the unit recognized the revenue immediately rather than over the
two-year life of the contract and had depreciated the capital equipment over its
useful life rather than matching it to the life of the contract. The Company
believes that the presence of the billing error and the accounting error each
constitute a reportable condition as defined under standards established by the
American Institute of Certified Public Accountants.
In response to the reportable conditions and material weakness in the
preceding two paragraphs, the Company is taking the following actions. With
regards to the purchased transportation accrual issue, the Company has altered
its methods to recognize the difference between actual costs of transportation
and estimates for such costs on a timely basis. With respect to the revenue
recognition errors, management of the units in question have been advised as to
the proper treatment of similar transactions in the future.
The Company has restated its consolidated financial statements for 2003,
2002 and 2001 to correct the processing errors related to its purchased
transportation accrual, the customer billings issue, and to reflect the related
income tax effects. In addition, the amounts owed as of December 31, 2003 and
2002 under various earn-out provisions have been changed to reflect the impact
of the restatement.
A material weakness in internal accounting control is a condition in
which the specific control procedures or the degree of compliance with them do
not reduce to relatively low level the risk that errors or irregularities in
amounts that would be material in relation to the financial statements may occur
and not be detected within a timely period by employees in the normal course of
performing their assigned tasks. The Company has implemented changes in
procedures for the reporting of purchased transportation and believes that these
changes will assure the proper recognitions of these costs. 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 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 is focusing 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 immediate changes in processes at each of
these locations to correct the errors that occurred and to reduce the likelihood
that similar errors could occur in the future. In addition, the Company has
changed its organizational structure to require the senior financial
representatives within the Domestic Services and International Services
platforms to report directly to the Company's Chief Financial Officer.
As of the date of this Report, the Company believes it has a plan that,
when completed, will eliminate the reportable conditions and material weakness
described above.
Disclosure Controls and Procedures
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 in connection with the filing of its initial Annual Report on Form
10-K based upon the information available at that time and concluded that the
Company's disclosure controls and procedures were effective. Subsequent to that
evaluation, the Company discovered the reportable conditions and material
weaknesses described above (other than the reportable condition described in the
first paragraph of this Item 9A which was discovered prior to December 31, 2003)
and has taken the remedial actions described above. In connection with the
preparation of this Form 10-K/A, the Company has carried out an additional
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 Chief Executive Officer and Chief Financial
Officer. Based on that evaluation, taking into account the reportable conditions
and material weaknesses described above, the Company's Chief Executive Officer
and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures were not effective as of the end of the period covered
by this report. However, the Company believes that as a result of the remedial
measures implemented by the Company, the Company's disclosure controls and
procedures are now effective.
41
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
disclosures.
Changes in Internal Control over Financial Reporting
Other than as described above, there have been no changes in the
Company's internal control over financial reporting during the period covered by
this report that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our directors and executive officers as of March 1, 2004 were as follows:
NAME AGE POSITION
---- --- --------
Dennis L. Pelino 56 Chairman of the Board of Directors and Chief Executive Officer
Gary A. Koch 45 Chief Executive Officer of Stonepath Logistics Domestic Services, Inc.
Jason F. Totah 44 Chief Executive Officer of Stonepath Logistics International Services, Inc.
Bohn H. Crain 40 Chief Financial Officer and Treasurer
Stephen M. Cohen 47 Senior Vice President, General Counsel and Secretary
Thomas L. Scully 54 Vice President and Controller/Principal Accounting Officer
J. Douglass Coates 61 Director
John H. Springer (2) 47 Director
David R. Jones (1)(2) 55 Director
Aloysius T. Lawn, IV (1)(2) 45 Director
Robert McCord (1) 45 Director
----------
(1) Member of Audit Committee
(2) Member of Compensation Committee
The following is a brief summary of the business experience of the
foregoing directors and executive officers.
Dennis L. Pelino has served as our Chairman of the Board of Directors
and Chief Executive Officer since June 21, 2001. Mr. Pelino has over two decades
of executive experience in the logistics industry. From 1986 to 1999, he was
employed by Fritz Companies, Inc., initially as director of International
Operations and Sales and Marketing, in 1993 as its Chief Operating Officer and
commencing in 1996, also as its President. Mr. Pelino was also a member of the
Board of Directors of Fritz Companies from 1991 to 1999. During Mr. Pelino's
tenure, he acquired or started over 50 companies for Fritz as it became one of
the leading global logistics companies. Prior to Fritz, Mr. Pelino held senior
executive positions in the container shipping industry and in the domestic
full-service truck leasing industry. Most recently, from 1999 through 2001, Mr.
Pelino has been involved as a director and principal of a number of private
ventures which explored opportunities in the logistics industry and which
provided consulting services relative to business opportunities in Latin
America, China and other Far Eastern regions.
42
Gary A. Koch serves as the Chief Executive Officer of Air Plus and
Stonepath Logistics Domestic Services, Inc. Mr. Koch co-founded Air Plus in May
1990. In ten years, he built Air Plus into a transportation logistics company
serving a customer base of manufacturing distributors and national retail chains
with close to $60.0 million in annual revenue, over 200 employees and 16 offices
in North American cities. Mr. Koch has over twenty years of logistics experience
in the U.S. and Canadian markets with expertise in traditional air freight and
distribution logistics. Mr. Koch received a B.S. in Marketing from Purdue
University.
Jason F. Totah serves as the Chief Executive Officer of Stonepath
Logistics International Services, Inc. (SLIS, f/k/a Global Transportation
Services, Inc.). Mr. Totah joined Global in 1990 and has held several positions
including Seattle Branch manager and Senior Vice President, Sales and Marketing,
and Senior Vice President of Sales and Operations. Prior to joining Global, he
worked in international logistics for Amoco Petroleum, stationed in various
locations around the world. He graduated from Oregon State in 1983 with a degree
in Agriculture Engineering.
Bohn H. Crain has served as our Chief Financial Officer since January
10, 2002 and our Treasurer since May 30, 2002. Mr. Crain has over 15 years of
experience in finance and accounting as well as extensive knowledge of
transportation and logistics. Prior to joining Stonepath's executive team, he
served from January 2001 to September 2001 as Executive Vice President and Chief
Financial Officer for Schneider Logistics, Inc., a third-party logistics
company. Before Schneider, Mr. Crain served from May 2000 to January 2001 as
Vice President and Treasurer for Florida East Coast Industries, Inc., and from
June 1989 to May 2000, he held various Vice President and treasury positions
with CSX and various of its subsidiaries. Mr. Crain holds a B.S. in Business
Administration - Accounting from the University of Texas.
Stephen M. Cohen has served as the Company's Senior Vice President,
General Counsel and Secretary since April 2000. Since 1980, Mr. Cohen has been
engaged in the practice of law, having most recently been a shareholder of
Buchanan Ingersoll P.C. from March 1996 to April 2000 and a partner at Clark,
Ladner, Fortenbaugh & Young from March 1990 to March 1996. Mr. Cohen's practice
focused on corporate finance and federal securities matters. Mr. Cohen received
a B.S. in Accounting from the School of Commerce and Finance of Villanova
University, a J.D. from Temple University and a L.L.M. in Taxation from
Villanova University School of Law.
Thomas L. Scully has served as our Vice President and Controller since
November 19, 2001. Before joining Stonepath, Mr. Scully was a senior manager
within the assurance and advisory services of Deloitte & Touche, LLP from
December 1996 to November 2001. Prior to Deloitte & Touche, from October 1980 to
June 1996, Mr. Scully was an audit partner at BDO Seidman, LLP where he led
numerous accounting, auditing and tax engagements for publicly traded and
privately-held local, national, and international clients. Prior to BDO, he held
the position of audit supervisor at Coopers & Lybrand, LLP. Mr. Scully is a
certified public accountant and earned a B.S. in Accounting from St. Joseph's
University, Philadelphia.
J. Douglass Coates has served as a member of our Board of Directors
since August 2001. He has been principal of Manalytics International, Inc., a
transportation, logistics and supply chain consulting firm based in San
Francisco, California, since 1992. He was previously President of ACS Logistics,
a division of American President Lines, and President of Milne Truck Lines, then
a subsidiary of the Sun Company. Mr. Coates holds a B.S. in Engineering from
Pennsylvania State University and an MBA from the Wharton School of the
University of Pennsylvania.
John H. Springer has served as a member of our Board of Directors since
May 2003. Mr. Springer has extensive global supply chain management and
logistics experience, having held both domestic U.S. and international logistics
positions at IBM Corporation, Union Pacific Corporation's third party logistics
unit, and at Dell Computer from 1995 to 2002. Mr. Springer joined Nike Inc. in
2002 and is its Director of Global Operations - Nike Golf. Mr. Springer has been
active in the Council of Logistics Management throughout his career, including
holding the position of President for the Central Texas region. He earned his
B.S. at Syracuse University in Transportation & Distribution Management, and his
MBA from St. Edwards University in Austin, Texas.
David Jones has served as a member of our Board of Directors since
September 2000. Mr. Jones has been President of DR Jones Financial, Inc., a
privately-held consulting firm since its formation in September 1995. He is
presently a director of Financial Asset Securities Corporation, an affiliate of
Greenwich Capital Markets, Inc. Prior to forming DR Jones Financial, Inc., Mr.
Jones was Senior Vice President-Asset Backed Finance of Greenwich Capital
Markets, Inc. from 1989 to 1995. Mr. Jones served as a Vice President, and
subsequently as a Managing
43
Director of The First Boston Corporation, an investment banking firm, from 1982
to 1989 and as Manager-Product Development of General Electric Credit Corp., an
asset-based lender and financial services company, from 1981 to 1982. Mr. Jones
is a graduate of Harvard College and has an MBA from the Amos Tuck School of
Business Administration.
Aloysius T. Lawn has served as a member of our Board of Directors since
February 2001. Mr. Lawn is the Executive Vice President - General Counsel and
Secretary of Talk America Holdings, Inc., an integrated communications service
provider with programs designed to benefit the residential and small business
markets. Prior to joining Talk America Holdings, Inc. in 1996, Mr. Lawn was an
attorney in private practice with extensive experience in private and public
financings, mergers and acquisitions, securities regulation and corporate
governance from 1985 through 1995. Mr. Lawn graduated from Yale University and
Temple University School of Law.
Robert McCord has served as a member of our Board of Directors since
March 2001. He is also a Managing Director of PA Early Stage, an affiliated fund
of Safeguard Scientifics, Inc. At PA Early Stage, which he co-founded in 1997,
Mr. McCord specializes in business development for their portfolio companies. He
also serves as President and Chief Executive Officer of the Eastern Technology
Council, a consortium of more than 1,200 technology-oriented companies. At the
Technology Council he provides contacts, capital and information for senior
executives. Mr. McCord co-founded and also serves as a principal of the Eastern
Technology Fund, which provides seed and early-stage funding for technology
companies in the eastern corridor. Previously, he served as Vice President of
Safeguard Scientifics, Inc., a leader in identifying, developing and operating
premier technology companies. Before joining Safeguard, Mr. McCord spent a
decade on Capitol Hill where he served as Chief of Staff, Speechwriter and
Budget Analyst in a variety of congressional offices. He specialized in budget
and deregulatory issues and, as Chief Executive Officer of the bipartisan
Congressional Institute for the Future, he ran a staff which tracked legislation
and provided policy analyses and briefings. Mr. McCord earned his B.S., with
high honors, from Harvard University and his MBA from the Wharton School.
CODE OF ETHICS
Our Board of Directors has adopted a Code of Ethics applicable to all of
our employees, including our Chief Executive Officer, Chief Financial Officer,
and Principal Accounting Officer and Controller. A copy of our Code of Ethics is
attached as an exhibit to this Annual Report on Form 10-K/A. We intend to
provide any disclosures which are required by the rules of the Securities and
Exchange Commission, or which we otherwise determine to be appropriate, with
respect to amendments of, and waivers from our Code of Ethics by posting such
disclosures on our Internet website, www.stonepath.com.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT
Based solely on our review of copies of forms filed pursuant to Section
16(a) of the Securities Exchange Act of 1934, as amended, and written
representations from certain reporting persons, we believe that during 2003 all
reporting persons timely complied with all filing requirements applicable to
them.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation paid or
accrued for the three fiscal years ended December 31, 2003 to or for the benefit
of our Chief Executive Officer and our four most highly compensated executive
officers whose total annual salary and bonus compensation exceeded $100,000 (the
"Named Executive Officers").
44
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
----------------------- -----------------------
RESTRICTED
STOCK NUMBER OF ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS AWARDS OPTIONS(1) COMPENSATION(2)
----------------------------- ---------- ---------- ---------- ---------- ---------------
Dennis L. Pelino, Chairman 2003 $ 360,000 -- -- 700,000(3) --
and Chief Executive Officer 2002 $ 360,000 -- -- 1,900,000(4) --
2001 $ 158,691 $ 180,000 -- 1,800,000(5) --
Stephen M. Cohen, Senior 2003 $ 200,000 $ 40,000 -- 60,000(6) $ 62,000
Vice President, General 2002 $ 200,000 $ 15,000 -- 100,000(7) $ 62,000
Counsel and Secretary 2001 $ 227,884 $ 50,000 -- 750,000(8) --
Bohn H. Crain, Chief Financial 2003 $ 200,000 -- -- 325,000(9) --
Officer and Treasurer 2002 $ 200,000 $ 37,500 -- 350,000(10) $ 44,000
Gary A. Koch, Chief Executive 2003 $ 270,509 -- -- -- --
Officer of
Stonepath Logistics Domestic 2002 $ 264,497 -- -- -- --
Services, Inc. 2001 $ 69,950 -- -- -- --
Jason F. Totah, Chief 2003 $ 259,436 $ 150,000 -- -- --
Executive Officer of
Stonepath Logistics 2002 $ 187,500 $ 131,250 -- -- --
International Services, Inc.
----------
(1) This table does not include options that were granted to the Named
Executive Officers during the first quarter of 2004, as follows: 1,034,600
to Dennis L. Pelino; 100,000 to Stephen M. Cohen; 123,300 to Bohn H. Crain;
150,000 to Gary A. Koch and 93,100 to Jason F. Totah.
(2) During the periods reflected, certain of the officers named in this table
received perquisites and other personal benefits not reflected in the
amounts of their respective annual salaries or bonuses. The dollar amount
of these benefits did not, for any individual in any year, exceed the
lesser of $50,000 or 10% of the total annual salary and bonus reported for
that individual in any year, unless otherwise noted.
(3) These options were granted on March 10, 2003. The first grant of 300,000
options vested immediately. The second grant of 400,000 options vest to the
extent of 133,334 on the first anniversary date of the award date and to
the extent of 133,333 on the second and third anniversaries of the award
date.
(4) These options were granted on July 3, 2002 and vest to the extent of
633,334 on the first anniversary of the award date and to the extent of
633,333 on the second and third anniversaries of the award date, with 100%
acceleration of vesting in the event of a change of control transaction.
These options also vest fully upon death, disability, or termination of
employment without cause.
(5) These options were granted in conjunction with Mr. Pelino's employment by
the Company on June 21, 2001 and are fully vested.
45
(6) The first grant of 10,000 options occurred on March 25, 2003. One-third of
the options vested on the grant date with the remainder vesting over the
following 24 months. The second grant of 50,000 options occurred on
September 5, 2003. These options vest to the extent of 16,666.66 on the
first, second and third anniversaries of the award date.
(7) These options were granted on July 3, 2002. Twenty-five percent of the
options vest on July 3, 2003 and the remainder vest pro rata over the
following 36 months, with 100% acceleration of vesting following a change
of control transaction.
(8) These options were granted in conjunction with an amendment to Mr. Cohen's
employment agreement during April 2001. They vest pro rata over the
thirty-six (36) month period of his employment through April 2004, with
100% acceleration of vesting following a change of control, or upon a
termination of employment without cause. In the event of death or
disability, the options which would have become vested within the next 12
months become vested.
(9) The first grant of 200,000 options occurred on February 24, 2003.
Twenty-five percent of the options vested on the grant date with the
remainder vesting over the following 36 months. The second grant of 25,000
options occurred on March 25, 2003. One-third of the options vested on the
grant date with the remainder vesting over the following 24 months. The
third grant of 100,000 occurred on September 5, 2003. These options vest to
the extent of 33,333.33 on the first and second anniversaries of the award
date and to the extent of 33,333.34 on the third anniversary of the award
date.
(10) 150,000 of these options were granted on January 10, 2002, of which 50,000
vested on January 10, 2003, with the remainder vesting over the following
24 months and with 100% acceleration of vesting following a change of
control transaction or upon a termination of employment without cause.
200,000 of these options were granted on July 3, 2002, of which 50,000
vested on July 3, 2003, with the remainder vesting pro rata over the
following 36 months and with 100% acceleration of vesting following a
change of control transaction, or upon a termination of employment without
cause.
EMPLOYMENT AGREEMENTS
On March 10, 2004, effective as of January 1, 2004, we entered into an
amended employment agreement with our Chief Executive Officer, Dennis L. Pelino.
This agreement amended our prior agreements with Mr. Pelino dated February 22,
2002 and June 21, 2001. Pursuant to this amendment, we have agreed to extend the
term of employment of Mr. Pelino as our Chief Executive Officer through June
2009. The amendment also increased the annual compensation payable to Mr. Pelino
by granting him, in addition to his current base salary of $360,000, options to
purchase 359,000 shares of our common stock which vest in equal installments
over the term of his employment. This grant of options was intended to provide
Mr. Pelino with incremental compensation of $700,000 over the term of his
employment. In addition to his base salary, Mr. Pelino is entitled to bonus
compensation based upon the achievement of certain target objectives, as well as
discretionary merit bonuses that can be awarded at the discretion of our Board
of Directors. Mr. Pelino is also entitled to certain severance benefits upon his
death, disability or termination of employment. Pursuant to the employment
agreement, Mr. Pelino is also entitled to fringe benefits including
participation in pension, profit sharing and bonus plans, as applicable, and
life insurance, hospitalization, major medical, paid vacation and expense
reimbursement.
As of April 19, 2001, we entered into a three-year employment agreement
with our General Counsel, Stephen M. Cohen. This was further modified effective
December 27, 2001. This had the effect of amending and restating our prior
employment agreement with Mr. Cohen entered into in April 2000. Pursuant to this
agreement, we have agreed to employ Mr. Cohen as our General Counsel through
April 19, 2004 at an annual base salary of $200,000. In addition to his annual
base salary, Mr. Cohen's employment agreement provides for bonus compensation
based upon the achievement of certain target objectives, as well as
discretionary merit bonuses that can be awarded at the discretion of our Board
of Directors. Mr. Cohen is also entitled to certain severance benefits upon his
death, disability or termination of employment. Pursuant to his employment
agreement, Mr. Cohen is entitled to fringe benefits including participation in
pension, profit sharing and bonus plans, as applicable, and life insurance,
hospitalization, major medical, paid vacation and expense reimbursement.
Effective as of February 1, 2003, we entered into an Amended Employment
Agreement with our Chief Financial Officer, Bohn H. Crain. This agreement
amended and restated our prior agreement with Mr. Crain dated January 10, 2002.
Pursuant to this agreement, we have agreed to employ Mr. Crain as our Chief
Financial Officer through February 1, 2006 at an annual base salary of $200,000.
In addition to his annual base salary, Mr. Crain's employment agreement provides
for bonus compensation based upon the achievement of certain target objectives,
as well as bonus compensation determined at the discretion of the Board of
Directors. Mr. Crain is also entitled to certain severance benefits upon his
death, disability or termination of employment. Pursuant to his employment
agreement, Mr. Crain is entitled to fringe benefits including participation in
pension, profit sharing and bonus plans, as applicable, and life insurance,
hospitalization, major medical, paid vacation and expense reimbursement.
46
CHANGE IN CONTROL ARRANGEMENTS
Our Chief Executive Officer, Chief Financial Officer and General Counsel
are each employed under agreements that contain change in control arrangements.
If employment of any of these officers is terminated following a change in
control (other than for cause), then we must pay such terminated employee a
termination payment equal to 2.99 times his salary and bonus, based upon the
average annual bonus paid to him prior to termination of his employment. In
addition, all of their unvested stock options shall immediately vest as of the
termination date of their employment due to a change in control. In each of
their agreements, a change in control is generally defined as the occurrence of
any one of the following:
o any "Person" (as the term "Person" is used in Section 13(d) and
Section 14(d) of the Securities Exchange Act of 1934), except for
the effected employee, becoming the beneficial owner, directly or
indirectly, of our securities representing 50% or more of the
combined voting power of our then outstanding securities;
o a contested proxy solicitation of our stockholders that results in
the contesting party obtaining the ability to vote securities
representing 50% or more of the combined voting power of our
then-outstanding securities;
o a sale, exchange, transfer or other disposition of 50% or more in
value of our assets to another Person or entity, except to an entity
controlled directly or indirectly by us;
o a merger, consolidation or other reorganization involving us in
which we are not the surviving entity and in which our stockholders
prior to the transaction continue to own less than 50% of the
outstanding securities of the acquirer immediately following the
transaction, or if a plan involving our liquidation or dissolution
other than pursuant to bankruptcy or insolvency laws is adopted; or
o during any period of twelve consecutive months, individuals who at
the beginning of such period constituted the Board of Directors
cease for any reason to constitute at least a majority of the Board
of Directors unless the election, or the nomination for election by
our stockholders, of each new director was approved by a vote of at
least a majority of the directors then still in office who were
directors at the beginning of the period.
Notwithstanding the foregoing, a "change of control" is not deemed to
have occurred (i) in the event of a sale, exchange, transfer or other
disposition of substantially all of our assets to, or a merger, consolidation or
other reorganization involving, any entity in which the effected employee has,
directly or indirectly, at least a 25% equity or ownership interest; or (ii) in
a transaction otherwise commonly referred to as a "management leveraged
buy-out."
In addition, the existing stock options granted to these executive
officers fully vest upon a "change in control," as defined within our Stock
Incentive Plan.
DIRECTORS COMPENSATION
Non-employee directors are paid $3,750 per quarter, provided that each
member attends 75% of all meetings. In addition, a quarterly fee of $3,750 is
paid to the chairman of the Audit and Compensation Committees. Upon joining our
Board of Directors, each of our non-employee directors received an option to
purchase 50,000 shares of our common stock with an exercise price equal to the
closing price of our common stock on the trading day prior to the date of grant.
One-half of these options vested on the first anniversary of the director's
membership on the Board, and the balance vest on the second anniversary of Board
membership. On November 5, 2002 each member of our Audit Committee received
options to purchase 15,000 shares of our common stock at an exercise price of
$1.45 per share (of which 50% vested on November 5, 2003 and the balance vest on
November 5, 2004, contingent upon continued Board service). In addition, on
January 23, 2004, the chairmen of each of our Audit Committee and Compensation
Committee received options to purchase 25,000 shares of our common stock at an
exercise price of $3.05 per share (of which 50% vest on January 23, 2005 and the
balance vest on January 23, 2006, contingent upon continued Board service).
47
STOCK OPTIONS AND WARRANTS
The following table sets forth information on option grants in fiscal
2003 to the Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT
% OF TOTAL ASSUMED ANNUAL RATES OF
OPTIONS STOCK PRICE APPRECIATION FOR
NUMBER OF GRANTED TO MARKET PRICE OPTION TERM
OPTIONS EMPLOYEES IN EXERCISE ON DATE OF EXPIRATION -----------------------------
NAME GRANTED FISCAL-YEAR PRICE GRANT DATE 5% 10%
---------------- ---------- ------------ ---------- ------------ -------------- ------------ ------------
Dennis L. Pelino 300,000 16.79% $ 1.68 $ 1.68 March 2013 $ 316,963 $ 803,246
400,000 22.38 2.00 1.68 March 2013 294,617 942,995
Stephen M. Cohen 10,000 0.56 1.81 1.81 March 2013 11,383 28,847
50,000 2.80 2.24 2.24 September 2013 70,436 178,499
Bohn H. Crain 200,000 11.19 1.53 1.53 February 2013 192,442 487,685
25,000 1.40 1.81 1.81 March 2013 28,457 72,117
100,000 5.60 2.24 2.24 September 2013 140,872 356,998
Gary A. Koch -- -- -- -- -- -- --
Jason F. Totah -- -- -- -- -- -- --
The following table sets forth information concerning year-end option
values for fiscal 2003 for the Named Executive Officers. The value of the
options was based on the closing price of our common stock on December 31, 2003
of $2.26.
FISCAL YEAR END OPTION VALUES
NUMBER OF UNEXERCISED OPTIONS VALUE OF UNEXERCISED IN-THE-MONEY
SHARES AT FISCAL YEAR END OPTIONS AT FISCAL YEAR END
ACQUIRED ON VALUE ----------------------------- ----------------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ----------- ------------- ------------- -------------- ----------------
Dennis L. Pelino(1) -- -- 2,733,334 1,666,666 $ 3,374,001 $ 1,319,999
Stephen M. Cohen(2) -- -- 707,917 202,083 1,143,292 203,208
Bohn H. Crain(3) -- -- 252,082 422,918 172,270 250,980
Gary A. Koch(4) -- -- 70,833 129,167 68,000 123,999
Jason F. Totah(5) -- -- 112,500 137,500 33,000 57,000
----------
(1) Does not include the grant to Mr. Pelino on January 23, 2004 of options to
purchase 550,000 shares of the Company's common stock at an exercise price
of $3.05 per share, or the grant to Mr. Pelino on February 26, 2004 of
options to purchase 125,600 shares of the Company's common stock at an
exercise price of $3.38 per share, or the grant to Mr. Pelino on March 11,
2004 of options to purchase 359,000 shares of the Company's common stock at
an exercise price of $3.75 per share.
(2) Does not include the grant to Mr. Cohen on January 9, 2004 of options to
purchase 100,000 shares of the Company's common stock at an exercise price
of $2.38 per share.
(3) Does not include the grant to Mr. Crain on January 9, 2004 of options to
purchase 100,000 shares of the Company's common stock at an exercise price
of $2.38 per share, or the grant to Mr. Crain on February 26, 2004 of
options to purchase 23,300 shares of the Company's common stock at an
exercise price of $3.38 per share.
(4) Does not include the grant to Mr. Koch on January 9, 2004 of options to
purchase 150,000 shares of the Company's common stock at an exercise price
of $2.38 per share.
48
(5) Does not include the grant to Mr. Totah on January 9, 2004 of options to
purchase 80,000 shares of the Company's common stock at an exercise price of
$2.38 per share, or the grant to Mr. Totah on February 26, 2004 of options
to purchase 13,100 shares of the Company's common stock at an exercise price
of $3.38 per share.
Outstanding Stock Options
The Amended and Restated Stonepath Group, Inc. 2000 Stock Incentive
Plan, (the "Stock Incentive Plan") covers 13,000,000 shares of common stock.
Under its terms, employees, officers and directors of the Company and its
subsidiaries are currently eligible to receive non-qualified stock options,
restricted stock awards and incentive stock options within the meaning of
Section 422 of the Code. In addition, advisors and consultants who perform
services for the Company or its subsidiaries are eligible to receive
non-qualified stock options under the Stock Incentive Plan. The Stock Incentive
Plan is administered by the Board of Directors or a committee designated by the
Board of Directors.
All stock options granted under the Stock Incentive Plan are exercisable
for a period of up to ten (10) years from the date of grant. The Company may not
grant incentive stock options pursuant to the Stock Incentive Plan at exercise
prices which are less than the fair market value of the common stock on the date
of grant. The term of an incentive stock option granted under the Stock
Incentive Plan to a stockholder owning more than 10% of the issued and
outstanding common stock may not exceed five years and the exercise price of an
incentive stock option granted to such stockholder may not be less than 110% of
the fair market value of the common stock on the date of grant. The Stock
Incentive Plan contains certain limitations on the maximum number of shares of
the common stock that may be awarded in any calendar year to any one individual
for the purposes of Section 162(m) of the Code.
PLAN NON-PLAN TOTAL
---------- --------- ----------
Vested as of 12/31/03 5,039,597 1,326,700 6,366,297
To vest in 2004 2,324,127 -- 2,324,127
To vest in 2005 1,880,577 -- 1,880,577
To vest in 2006 1,043,916 -- 1,043,916
To vest in 2007 25,417 -- 25,417
---------- --------- ----------
10,313,634 1,326,700 11,640,334
========== ========= ==========
Generally, most of the options under the Stock Incentive Plan are
granted subject to periodic vesting over a period of between three and four
years, contingent upon continued employment with the Company. In addition to the
stock options covered by the Stock Incentive Plan, the Company has outstanding
options to purchase 1,326,700 shares of common stock. The following schedule
identifies the vesting schedule associated with all of the Company's outstanding
options:
At March 1, 2004, these options were outstanding at the following
exercise prices:
NUMBER OF OPTIONS
-----------------------------------
PLAN NON-PLAN TOTAL RANGE OF EXERCISE PRICES
---------- --------- ---------- ------------------------
3,248,334 1,109,500 4,357,834 $0.50 to $1.00
4,567,100 -- 4,567,100 $1.01 to $2.00
2,498,200 144,000 2,642,200 $2.01 to $4.00
-- 73,200 73,200 $6.38 to $17.50
---------- --------- ----------
10,313,634 1,326,700 11,640,334
========== ========= ==========
49
Outstanding Warrants
As of March 1, 2004, warrants to purchase 1,487,563 shares of common
stock were outstanding. Most of these warrants were granted in connection with
investment related transactions. With the exception of warrants to purchase
50,000 shares at $1.23 per share, and warrants to purchase 99,000 shares at
$1.49 per share, all of the remaining warrants are subject to an exercise price
of $1.00 per share and expire in July 2005.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following tables set forth information with respect to the
beneficial ownership of common stock and Series D preferred stock owned, as of
March 1, 2004, by:
o the holders of more than 5% of any class of the Company's voting
securities;
o each of the directors;
o each of the executive officers; and
o all directors and executives officers of the Company as a group.
As of March 1, 2004, an aggregate of 39,004,242 shares of common stock
and 309,397 shares of Series D preferred stock were issued and outstanding. Each
share of Series D preferred stock is convertible into ten shares of our common
stock. For purposes of computing the percentages under the following tables, it
is assumed that all options and warrants to acquire common stock which have been
issued to the directors, executive officers and the holders of more than 5% of
common stock and are fully vested or will become fully vested within 60 days
from March 1, 2004 have been exercised by these individuals and the appropriate
number of shares of common stock have been issued to these individuals.
COMMON STOCK
SHARES OWNED
BENEFICIALLY AND PERCENTAGE OF
NAME OF BENEFICIAL OWNER POSITION OF RECORD(1) CLASS
----------------------------------------------- ----------------- ---------------- -------------
Dennis L. Pelino(2) Officer, Director 3,581,824 8.49%
Stephen M. Cohen(3) Officer 845,878 2.12%
Bohn H. Crain(4) Officer 379,095 *
Thomas L. Scully(5) Officer 46,462 *
Gary A. Koch(6) (7) 595,579 1.52%
Jason F. Totah(8) (9) 202,267 *
David R. Jones(10) Director 142,500 *
Aloysius T. Lawn, IV(11) Director 57,500 *
Robert McCord(12) Director 100,000 *
J. Douglass Coates(13) Director 50,000 *
John H. Springer(14) Director -- *
All directors and executive officers as a group
(11 people) 6,001,105 13.63%
----------
(*) Less than one percent.
50
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in the
regulations of the SEC under the Exchange Act. They may include securities
owned by or for, among others, the spouse and/or minor children of an
individual and any other relative who has the same home as such individual,
as well as, other securities as to which the individual has or shares voting
or investment power. The number of shares beneficially owned by the
individual may include options to purchase shares of our common stock
exercisable as of, or within 60 days of March 1, 2004. Beneficial ownership
may be disclaimed as to certain of the securities.
(2) Includes 406,222 shares of common stock held by the Dennis L. Pelino and
Meredith L. Pelino Declaration of Trust, of which Dennis L. Pelino and his
spouse are trustees and beneficiaries, though beneficial ownership of which
may be disclaimed. Also includes 3,175,602 shares of common stock issuable
upon exercise of vested options. Does not include 1,899,998 shares of common
stock issuable pursuant to options not presently exercisable and not
exercisable within 60 days of March 1, 2004. Also, does not include options
to purchase 359,000 shares of common stock that were granted after March 1,
2004.
(3) Includes 11,850 shares of common stock. Also includes 834,028 shares of
common stock issuable upon exercise of vested options and options which vest
within 60 days of March 1, 2004. Does not include 175,972 shares of common
stock issuable pursuant to options not presently exercisable and not
exercisable within 60 days of March 1, 2004.
(4) Includes 17,600 shares of common stock. Also includes 361,495 shares of
common stock issuable upon exercise of vested options and options which vest
within 60 days of March 1, 2004. Does not include 436,805 shares of common
stock issuable pursuant to options not presently exercisable and not
exercisable within 60 days of March 1, 2004.
(5) Includes 46,462 shares of common stock issuable upon exercise of vested
options and options which vest within 60 days of March 1, 2004. Does not
include 67,838 shares of common stock issuable pursuant to options not
presently exercisable and not exercisable within 60 days of March 1, 2004.
(6) Includes 458,079 shares of common stock held by the Revocable Trust of Gary
A. Koch, of which Gary A. Koch is the trustee and a beneficiary, beneficial
ownership of which may be disclaimed. Also includes 137,500 shares of common
stock issuable upon exercise of vested options and options which vest within
60 days of March 1, 2004. Does not include 212,500 shares of common stock
issuable pursuant to options not presently exercisable and not exercisable
within 60 days of March 1, 2004.
(7) Chief Executive Officer of Stonepath Logistics Domestic Services, Inc., a
wholly owned subsidiary of the Company.
(8) Includes 202,267 shares of common stock issuable upon the exercise of vested
options and options which vest within 60 days of March 1, 2004. Does not
include 140,833 shares of common stock issuable pursuant to options not
presently exercisable and not exercisable within 60 days of March 1, 2004.
(9) Chief Executive Officer of Stonepath Logistics International Services, Inc.,
a wholly owned subsidiary of the Company.
(10)Includes 85,000 shares of common stock. Also includes 57,500 shares of
common stock issuable upon exercise of vested options and options which vest
within 60 days of March 1, 2004. Does not include 32,500 shares of common
stock issuable pursuant to options not presently exercisable and not
exercisable within 60 days of March 1, 2004.
(11)Includes 57,500 shares of common stock issuable upon the exercise of vested
options and options which vest within 60 days of March 1, 2004. Does not
include 32,500 shares of common stock issuable pursuant to options not
presently exercisable and not exercisable within 60 days of March 1, 2004.
(12)Includes 100,000 shares of common stock issuable upon the exercise of vested
options and options which vest within 60 days of March 1, 2004.
(13)Includes 50,000 shares of common stock issuable upon the exercise of vested
options and options which vest within 60 days of March 1, 2004.
(14)Does not include 50,000 shares of common stock issuable pursuant to options
not presently exercisable and not exercisable within 60 days of March 1,
2004.
51
SERIES D PREFERRED STOCK
----------------------------------
SHARES OF
SERIES D PREFERRED
STOCK OWNED
BENEFICIALLY AND PERCENTAGE OF
NAME OF BENEFICIAL OWNER OF RECORD (1)(2) CLASS
------------------------------------------- ------------------ -------------
Brown Simpson Partners I, Ltd.
Carnegie Hall Tower
152 West 57th Street, 21st Floor
New York, NY 10019 201,184 65.0%
Schottenfeld Associates, L.P.
880 Third Avenue, 16th Floor
New York, NY 10022 25,451 8.2%
CSL Associates LP
399 Park Avenue - 37th Floor
New York, NY 10020 20,119 6.5%
Norton Herrick Irrevocable Securities Trust
20 Community Place, 2nd Floor
Morristown, NY 07960 39,201 12.7%
----------
(1) Beneficial ownership has been determined in accordance with Rule 13d-3
under the Securities Exchange Act of 1934. Unless otherwise noted, the
Company believes that all persons named in the table have sole voting and
investment power with respect to all shares of Series D preferred stock
beneficially owned by them.
(2) Each of the shares of Series D preferred stock converts into ten shares of
the Company's common stock. Shares of the Series D preferred stock have
limited voting rights, on an as converted to common stock basis, in
connection with a consolidation, sale or merger of the Company that could
result in a change of control.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
For information on the securities authorized for issuance under our
equity compensation plans, see "Equity Compensation Plan Information" in Item 5
of this Annual Report on Form 10-K/A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PARTICIPATION OF CHIEF EXECUTIVE OFFICER IN RECENT PRIVATE PLACEMENT TRANSACTION
At the request of one of the lead investors, Dennis L. Pelino, our Chief
Executive Officer, purchased 100,000 shares of our common stock at a price of
$1.54 per share in the private placement transaction that was completed on March
7, 2003. Mr. Pelino's purchase price represented a 14.1% premium over the
purchase price of $1.35 paid by the non-affiliated investors in the transaction.
PAYMENTS TO FORMER EXECUTIVE OFFICER
During 2002 and 2003, we made aggregate severance payments of $575,000
to Andrew Panzo, a former executive officer, in connection with a December 14,
2001 Separation Agreement in which Mr. Panzo resigned his position as an officer
of the Company. In connection with the Separation Agreement, we also agreed to
cover Mr. Panzo and his family on our medical plan during 2002 and to accelerate
the vesting of the balance of his options
52
to purchase 1,270,000 shares of our common stock. As of December 14, 2001, Mr.
Panzo had already vested in 1,102,500 of these options.
LOANS TO OFFICERS
In connection with our acquisition of Global on April 4, 2002, we
advanced the sum of $350,000 to Jason Totah. Mr. Totah was a former shareholder
of Global and is a significant employee of the Company, serving as the President
of Stonepath Logistics International Services, Inc. The advance to Mr. Totah is
to be repaid through 2006 by offset against the earn-out amounts that are
otherwise due to Mr. Totah under the Stock Purchase Agreement. The balance of
Mr. Totah's advance was $175,000 at December 31, 2003.
Under the terms of our employment agreement with Mr. Cohen, we provided
him with a loan in the principal amount of $100,000 in April 2001. The loan
accrues interest at the rate of 8% per annum and is due on April 17, 2004, or
such earlier date that Mr. Cohen shall have received aggregate proceeds of $5.0
million from the sale of his options or the shares of common stock underlying
his options. However, Mr. Cohen is not required to repay the loan if by April
17, 2004, the sum of the proceeds which he has received from the sale of his
options or the shares of common stock underlying his options and the remaining
equity in the options as of April 17, 2004 does not equal or exceed $5.0
million.
RELATED PARTY LEASE
Air Plus leases certain of its office and warehouse facilities from Gary
Koch. Mr. Koch was a former shareholder of Air Plus and is a significant
employee of the Company, serving as the Chief Executive Officer of Air Plus and
Stonepath Logistics Domestic Services, Inc. The Company paid $187,000 to Mr.
Koch in each of the years ended December 31, 2003 and 2002. Payments under the
lease with Mr. Koch were determined by reference to comparable rents, and
management believes the amounts payable thereunder represent fair market rates.
AMENDMENT AND RESTATEMENT OF EMPLOYMENT ARRANGEMENTS WITH EXECUTIVE OFFICERS
On March 11, 2004, we entered into an amended employment agreement with
our Chief Executive Officer, Dennis L. Pelino. This agreement amended our prior
agreements with Mr. Pelino dated February 22, 2002 and June 21, 2001 to extend
the term of his employment through June 2009, and to award Mr. Pelino a salary
increase in the form of additional options that vest over the period of the
employment agreement. On October 18, 2001, we amended the terms of the options
granted to Mr. Pelino under his original employment agreement dated June 21,
2001. We further amended the terms of Mr. Pelino's options on July 3, 2002, when
we accelerated the vesting of his original options to purchase 1,800,000 shares
of our common stock and granted him options to purchase an additional 1,900,000
shares of our common stock.
Effective as of February 1, 2003, we entered into an amended employment
agreement with our Chief Financial Officer, Bohn H. Crain. This agreement
amended and restated our prior agreement with Mr. Crain dated January 10, 2002.
53
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
For the years ended December 31, 2003 and 2002, professional services
were provided to the Company by KPMG LLP. The following table presents fees for
professional services rendered by KPMG LLP for the audit of the Company's annual
financial statements for the years ended December 31, 2003 and December 31,
2002, and fees billed for other services rendered by KPMG LLP during those
periods.
2003 2002
------------ ------------
Audit fees(1) $ 656,883 $ 299,000
Audit related fees(2) 125,000 124,292
Tax fees(3) 73,900 24,400
All other fees -- --
------------ ------------
Total $ 855,783 $ 447,692
============ ============
(1) Represents the aggregate fees billed for the audit of the Company's annual
financial statements, the reviews of the financial statements included in
the Company's quarterly reports on Form 10-Q, and services rendered in
connection with SEC registration statements and filings
(2) Represents fees billed for acquisition related services
(3) Represents fees billed for tax consulting services, primarily related to
international acquisitions
Our Audit Committee approves the engagement of our independent auditors
to render audit and non-audit services before they are engaged. All of the
services for which fees are listed above were pre-approved by our Audit
Committee.
54
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:
Report of Independent Registered Public Accounting Firm 61
Consolidated Balance Sheets as of December 31, 2003 (As restated) and 2002 (As restated) 62
Consolidated Statements of Operations for the Years Ended December 31, 2003 (As restated), 2002 63
(As restated) and 2001 (As restated)
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) for the Years
Ended December 31, 2003 (As restated), 2002 (As restated) and 2001 (As restated) 64
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003 (As restated), 2002 66
(As restated) and 2001 (As restated)
Notes to Consolidated Financial Statements 67
2. Financial Statement Schedule:
Report of Independent Registered Public Accounting Firm 94
Schedule II - Valuation and Qualifying Accounts 95
(b) Reports on Form 8-K:
We furnished two reports on Form 8-K during the fiscal quarter ended
December 31, 2003:
(i) Form 8-K dated November 11, 2003 providing information pursuant to
Regulation FD relative to the Company's results for the quarterly period
ended September 30, 2003.
(ii)Form 8-K dated December 29, 2003 providing information pursuant to
Regulation FD relative to the completion of several acquisitions, 2004
forecasted results of operations, and revisions to the Company's 2003
forecasted revenue.
(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)
55
EXHIBIT
NUMBER DOCUMENT
-------- --------
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)
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
2.6(4) Asset Purchase Agreement by and among Stonepath Logistics Government
Services, Inc. (f/k/a "Transport Specialists, Inc."), Regroup
Express L.L.C. and Jed J. Shapiro and Charles R. Cain, the sole
members of Regroup Express LLC, dated June 4, 2003
2.7(5) Asset Purchase Agreement by and among Stonepath Holdings (Hong Kong)
Limited, G Link Express Logistics (Singapore) Pte. Ltd, G Link
Express Pte. Ltd and the shareholders of G Link Express Pre. Ltd,
dated August 8, 2003
2.8(5) Asset Purchase Agreement by and among Stonepath Holdings (Hong Kong)
Limited, G Link Express (Cambodia) Pte. Ltd and the shareholders of
G Link Express (Cambodia) Pte. Ltd. dated August 8, 2003
3.1(6) Amended and Restated Certificate of Incorporation 3.2(7) Certificate
of Amendment to the Certificate of Incorporation
3.3(7) Amended and Restated Bylaws
3.4(8) Certificate of Designation of Series D Convertible Preferred Stock
4.1(6) Specimen Common Stock Certificate for Stonepath Group, Inc.
4.2(9) Form of Common Stock Purchase Warrant issued in connection with the
Series C Convertible Preferred Stock
4.3(10) 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(10) Form of Contingent Warrant issued upon conversion of the Series C
Convertible Preferred Stock effective as of July 19, 2002
4.5(8) Form of Exchange Agreement by and between the Company and certain
holders of the Company's Series C Convertible Preferred Stock
4.6(21) Stonepath Group, Inc. Amended and Restated 2000 Stock Incentive Plan
(the "Plan")
56
EXHIBIT
NUMBER DOCUMENT
-------- --------
4.7(12) Form of Stock Option Agreement under the Plan
4.8 (12) Form of Non-Plan Option to Purchase Common Stock of the Company
4.9(13) Form of Subscription Agreement by and between the Company and
certain purchasers of common shares (including exhibit providing for
registration rights)
4.10(13) Placement Agency Agreement between the Company and Stonegate
Securities, Inc. dated October 16, 2002
4.11(9) 2003 Employee Stock Purchase Plan
4.12(13) Form of Initial Warrants issued to Stonegate Securities, Inc as of
October 16,2002 4.13(13) Form of Representative's Warrants issued to
Stonegate Securities as of March 6, 2003
4.14(14) Form of subscription agreement by and between the Company and
certain holders of common stock (including the exhibit providing for
registration rights)
4.15(14) Amendment to Placement Agency Agreement between the Company and
Stonegate Securities, Inc. dated as of July 29, 2003
10.1(15) Amended and Restated Employment Agreement between the Company and
Dennis L. Pelino dated February 22, 2002
10.2(16) Amended and Restated Employment Agreement between the Company and
Stephen M. Cohen dated April 19, 2001
10.3(15) Letter Agreement between the Company and Stephen M. Cohen dated
December 27, 2001
10.4(13) Amended and Restated Employment Agreement between the Company and
Bohn H. Crain dated February 24, 2003
10.5(17) 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(13) Executive Employment Agreement between Global Transportation
Services, Inc. and Jason F. Totah dated April 4, 2002
10.8(18) Stonepath Group, Inc. 401(k) Profit Sharing Plan.
10.9(19) 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.
57
EXHIBIT
NUMBER DOCUMENT
--------- --------
10.10(21) Amendment to Loan and Security Agreement dated May 15, 2003 by and
among LaSalle Business Credit, LLC, Stonepath Group, Inc., Contract
Air, Inc., Distribution Services, Inc., Global Container Line, Inc.,
M.G.R., Inc., Net Value, Inc., Stonepath Logistics Domestic
Services, Inc., Stonepath Logistics International Services, Inc.,
Stonepath Operations Inc., and United American Acquisitions and
Management, Inc., and Transport Specialists, Inc.
10.11(20) Second Amendment to Loan and Security Agreement dated September 5,
2003 by and among LaSalle Business Credit, LLC, Stonepath Group,
Inc., Contract Air, Inc., Distribution Services, Inc., Global
Container Line, Inc., M.G.R., Inc., Net Value, Inc., Stonepath
Logistics Domestic Services, Inc., Stonepath Logistics Government
Services, Inc., Stonepath Logistics International Services, Inc.,
Stonepath Logistics International Services, Inc., Stonepath
Operations Inc., and United American Acquisitions and Management,
Inc.
10.12(21) Third Amendment to Loan and Security Agreement dated December 23,
2003 by and among LaSalle Business Credit, LLC, Stonepath Group,
Inc., Contract Air, Inc., Distribution Services, Inc., Global
Container Line, Inc., M.G.R., Inc., Net Value, Inc., Stonepath
Logistics Domestic Services, Inc., Stonepath Logistics Government
Services, Inc., Stonepath Logistics International Services, Inc.,
Stonepath Logistics International Services, Inc., Stonepath
Operations Inc., and United American Acquisitions and Management,
Inc.
10.13(21) Fourth Amendment and Consent Agreement to Loan and Security Agreement
dated January 30, 2004 by and among LaSalle Business Credit, LLC,
Stonepath Group, Inc., Contract Air, Inc., Distribution Services,
Inc., Global Container Line, Inc., M.G.R., Inc., Net Value, Inc.,
Stonepath Logistics Domestic Services, Inc., Stonepath Logistics
Government Services, Inc., Stonepath Logistics International
Services, Inc., Stonepath Logistics International Services, Inc.,
Stonepath Operations Inc., and United American Acquisitions and
Management, Inc.
10.14(21) Modification to Employment Agreement of Dennis L. Pelino dated
March 11, 2004
11(21) Code of Ethics
12(11) Calculation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends
21.1(21) Subsidiaries of Stonepath Group, Inc.
23.1(11) Consent of Independent Registered Public Accounting Firm
31.1(11) Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2(11) Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1(11) 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.)
58
EXHIBIT
NUMBER DOCUMENT
-------- --------
32.2(11) 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 Current Report on Form
8-K dated June 20, 2003, filed July 7, 2003
(5) Incorporated by reference to the Company's Current Report on Form
8-K dated August 8, 2003, filed August 13, 2003
(6) Incorporated by reference to the Company's Registration Statement on
Form S-1 (Reg. No. 333-88629) filed October 8, 1999
(7) Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 2000, filed April 2, 2001
(8) 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)
(9) Incorporated by reference to the Company's Current Report on Form
8-K dated March 3, 2000, filed March 17, 2000
(10) Incorporated by reference to the Company's Form 10-Q for the third
quarter ended September 30, 2002, filed November 14, 2002
(11) Filed herewith
(12) Incorporated by reference to the Company's Registration Statement on
Form S-8 filed December 11, 2001 (Registration No. 333-74918)
(13) Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 2002, filed March 31, 2003
(14) Incorporated by reference to the Company's Registration Statement on
Form S-3 (No. 333-110231) filed November 4, 2003
(15) Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 2001, filed March 29, 2002
(16) Incorporated by reference to the Company's Form 10-Q for the second
quarter ended June 30, 2001, filed August 13, 2001
(17) Incorporated by reference to the Company's Current Report on Form
8-K dated December 14, 2001, filed December 27, 2001
(18) Incorporated by reference to the Company's Registration Statement on
Form S-8 filed on February 25, 2003 (Registration No. 333-103439)
(19) Incorporated by reference to the Company's Current Report on Form
8-K dated May 15, 2002, filed May 20, 2002
(20) Incorporated by reference to the Company's Current Report on Form
8-K dated September 5, 2003, filed September 9, 2003
(21) Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 2003, filed March 15, 2004
59
THIS PAGE INTENTIONALLY LEFT BLANK
60
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2003 and 2002, 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, 2003. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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, 2003 and 2002, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2003, in conformity with U.S. generally accepted accounting
principles.
As discussed in Note 3 to the consolidated financial statements, the Company has
restated its consolidated financial statements as of December 31, 2003 and 2002
and for each of the years in the three-year period ended December 31, 2003.
/s/ KPMG LLP
Philadelphia, Pennsylvania
February 24, 2004, except as
to Note 3, the second paragraph
of Note 8 and the last four
paragraphs of Note 18, which
are as of January 31, 2005
61
STONEPATH GROUP, INC.
Consolidated Balance Sheets
December 31, 2003 and 2002
RESTATED RESTATED
2003 2002
--------------- ---------------
Assets
Current assets:
Cash and cash equivalents $ 3,074,151 $ 2,266,108
Accounts receivable, less allowances for doubtful accounts
of $1,055,000 and $320,000 at 2003 and 2002, respectively 38,250,610 21,799,983
Loans receivable from related parties 14,597 39,593
Prepaid expenses and other current assets 2,216,700 963,102
--------------- ---------------
Total current assets 43,556,058 25,068,786
Goodwill 31,508,931 19,131,060
Furniture and equipment, net 7,062,956 3,233,677
Acquired intangibles, net 6,775,893 5,042,555
Note receivable, related party 175,000 262,500
Other assets 1,189,917 1,246,847
--------------- ---------------
Total assets $ 90,268,755 $ 53,985,425
=============== ===============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 22,412,287 $ 14,778,997
Earn-out payable 3,548,534 2,609,715
Accrued payroll and related expenses 1,975,859 1,195,275
Capital lease obligation - current 671,197 --
Accrued expenses 1,821,671 1,776,100
--------------- ---------------
Total current liabilities 30,429,548 20,360,087
Capital lease obligation - long term 1,134,815 --
Deferred tax liability 1,035,600 460,800
--------------- ---------------
Total liabilities 32,599,963 20,820,887
--------------- ---------------
Minority interest 1,345,790 --
--------------- ---------------
Commitments and contingencies (Notes 10 and 11)
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares authorized; Series D,
convertible, issued and outstanding: 310,477 shares and 360,742 shares
at 2003 and 2002, respectively 310 361
Common stock, $.001 par value, 100,000,000 shares authorized; issued and
outstanding: 37,449,944 shares and 23,453,414 shares at 2003 and 2002,
respectively 37,450 23,453
Additional paid-in capital 220,067,956 196,235,064
Accumulated deficit (163,763,537) (162,977,934)
Accumulated other comprehensive income 1,997 --
Deferred compensation (21,174) (116,406)
--------------- ---------------
Total stockholders' equity 56,323,002 33,164,538
--------------- ---------------
Total liabilities and stockholders' equity $ 90,268,755 $ 53,985,425
=============== ===============
See accompanying notes to consolidated financial statements.
62
STONEPATH GROUP, INC.
Consolidated Statements of Operations
Years ended December 31, 2003, 2002 and 2001
RESTATED RESTATED RESTATED
2003 2002 2001
--------------- --------------- ---------------
Total revenue $ 220,084,190 $ 122,787,625 $ 15,597,889
Cost of transportation 158,105,595 86,084,863 10,008,584
--------------- --------------- ---------------
Net revenue 61,978,595 36,702,762 5,589,305
Personnel costs 31,887,773 19,089,069 5,997,245
Other selling, general and administrative costs 24,583,040 14,679,960 3,916,601
Depreciation and amortization 2,659,882 2,186,951 495,046
Litigation settlement and nonrecurring costs 1,169,035 -- --
--------------- --------------- ---------------
Income (loss) from operations 1,678,865 746,782 (4,819,587)
Other income (expense):
Provisions for excess earn-out payments (1,270,141) -- --
Interest income 48,909 90,680 1,285,657
Interest expense (141,859) -- (4,102)
Other income 84,850 37,311 13,153
--------------- --------------- ---------------
Income (loss) from continuing operations
before income taxes and minority interest 400,624 874,773 (3,524,879)
Income tax expense 735,886 421,177 71,500
--------------- --------------- ---------------
Income (loss) from continuing operations
before minority interest (335,262) 453,596 (3,596,379)
Minority interest 187,310 -- --
--------------- --------------- ---------------
Income (loss) from continuing operations (522,572) 453,596 (3,596,379)
Loss from discontinued operations, net of tax (263,031) -- (13,862,713)
--------------- --------------- ---------------
Net income (loss) (785,603) 453,596 (17,459,092)
Preferred stock dividends and effect of redemption -- 15,020,148 (4,151,198)
--------------- --------------- ---------------
Net income (loss) attributable to common
stockholders $ (785,603) $ 15,473,744 $ (21,610,290)
=============== =============== ===============
Basic earnings (loss) per common share -
Continuing operations $ (0.02) $ 0.70 $ (0.38)
Discontinued operations (0.01) -- (0.68)
--------------- --------------- ---------------
Earnings (loss) per common share $ (0.03) $ 0.70 $ (1.06)
=============== =============== ===============
Diluted earnings (loss) per common share -
Continuing operations $ (0.02) $ 0.02 $ (0.38)
Discontinued operations (0.01) -- (0.68)
--------------- --------------- ---------------
Earnings (loss) per common share $ (0.03) $ 0.02 $ (1.06)
=============== =============== ===============
Basic weighted average common shares outstanding 29,625,585 22,154,861 20,510,345
=============== =============== ===============
Diluted weighted average common shares outstanding 29,625,585 29,232,568 20,510,345
=============== =============== ===============
See accompanying notes to consolidated financial statements.
63
STONEPATH GROUP, INC.
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
Years ended December 31, 2003, 2002 and 2001
PREFERRED STOCK
-----------------------------------------------
SERIES C SERIES D COMMON STOCK ADDITIONAL
--------------------- ----------------------- -------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- -------- ---------- ---------- ------------ ------------ -------------
Balances at January 1, 2001 3,657,070 $ 3,657 -- $ -- 20,419,534 $ 20,419 $ 210,923,329
Net loss, as restated -- -- -- -- -- -- --
Other comprehensive income:
Unrealized gain on available-
for-sale Securities -- -- -- -- -- -- --
Comprehensive loss, as restated
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,
as restated 3,750,479 3,750 -- -- 20,903,110 20,903 210,730,999
Net income, as restated -- -- -- -- -- -- --
Exercise of options and warrants -- -- -- -- 440,808 441 424,740
Series C preferred stock
conversion (3,913,220) (3,913) 360,742 361 2,109,496 2,109 (16,971,597)
Preferred stock dividends 162,741 163 -- -- -- -- 1,952,729
Compensatory common stock,
options and warrants issued,
net of cancellations -- -- -- -- -- -- 95,000
Amortization of deferred stock-
based compensation -- -- -- -- -- -- 3,193
---------- -------- ---------- ---------- ------------ ------------ -------------
Balances at December 31, 2002,
as restated -- -- 360,742 361 23,453,414 23,453 196,235,064
Net loss, as restated -- -- -- -- -- -- --
Other comprehensive income:
Foreign currency translation
adjustment -- -- -- -- -- -- --
Comprehensive income, as restated
Issuance of common stock, net of
issuance costs -- -- -- -- 10,453,500 10,454 18,054,961
Exercise of options and warrants -- -- -- -- 920,739 921 649,858
Series D preferred stock
conversion -- -- (50,265) (51) 502,650 503 (452)
Issuance of common stock in lieu
of cash for earn-out -- -- -- -- 254,825 255 402,745
Issuance of common stock in lieu
of cash for legal settlement -- -- -- -- 271,339 271 583,279
Issuance of common stock for
acquisitions -- -- -- -- 1,593,477 1,593 4,142,501
Amortization of deferred
stock-based compensation -- -- -- -- -- -- --
---------- -------- ---------- ---------- ------------ ------------ -------------
Balances at December 31, 2003,
as restated -- $ -- 310,477 $ 310 37,449,944 $ 37,450 $ 220,067,956
========== ======== ========== ========== ============ ============ =============
See accompanying notes to consolidated financial statements.
64
STONEPATH GROUP, INC.
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
(continued)
Years ended December 31, 2003, 2002 and 2001
ACCUMULATED
OTHER DEFERRED TOTAL
ACCUMULATED COMPREHENSIVE STOCK-BASED COMPREHENSIVE
DEFICIT INCOME (LOSS) COMPENSATION TOTAL INCOME (LOSS)
-------------- -------------- -------------- -------------- --------------
Balances at January 1, 2001 $ (156,841,388) $ (8,688) $ (10,771,724) $ 43,325,605
Net loss, as restated (17,459,092) -- -- (17,459,092) $ (17,459,092)
Other comprehensive income:
Unrealized gain on available-for-sale
securities -- 8,688 -- 8,688 8,688
--------------
Comprehensive loss, as restated $ (17,450,404)
==============
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, as restated (178,451,678) (211,638) 32,092,336
Net income, as restated 453,596 -- -- 453,596 $ 453,596
==============
Exercise of options and warrants -- -- -- 425,181
Series C preferred stock conversion 16,973,040 -- -- --
Preferred stock dividends (1,952,892) -- -- --
Compensatory common stock, options and
warrants issued, net of cancellations -- -- -- 95,000
Amortization of deferred stock-
based compensation -- -- 95,232 98,425
-------------- -------------- -------------- --------------
Balances at December 31, 2002, as restated (162,977,934) -- (116,406) 33,164,538
Net loss, as restated (785,603) -- -- (785,603) $ (785,603)
Other comprehensive income:
Foreign currency translation adjustment -- 1,997 -- 1,997 1,997
--------------
Comprehensive loss, as restated $ (783,606)
==============
Issuance of common stock, net of
issuance costs -- -- -- 18,065,415
Exercise of options and warrants -- -- -- 650,779
Series D preferred stock conversion -- -- -- --
Issuance of common stock in lieu of cash
for earn-out -- -- -- 403,000
Issuance of common stock in lieu of cash
for legal settlement -- -- -- 583,550
Issuance of common stock for acquisitions -- -- -- 4,144,094
Amortization of deferred stock-based
compensation -- -- 95,232 95,232
-------------- -------------- -------------- --------------
Balances at December 31, 2003, as restated $ (163,763,537) $ 1,997 $ (21,174) $ 56,323,002
============== ============== ============== ==============
See accompanying notes to consolidated financial statements.
65
STONEPATH GROUP, INC.
Consolidated Statements of Cash Flows
Years ended December 31, 2003, 2002 and 2001
RESTATED RESTATED RESTATED
2003 2002 2001
--------------- --------------- ---------------
Cash flows from operating activities:
Net income (loss) $ (785,603) $ 453,596 $ (17,459,092)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Deferred income taxes 574,800 389,300 71,500
Depreciation and amortization 2,659,882 2,186,951 495,046
Stock-based compensation - continuing operations 95,232 98,425 2,394,106
Minority interest in income of subsidiaries 187,310 -- --
Loss from disposal of furniture and equipment -- 4,560 101,126
Issuance of common stock in litigation settlement 350,000 -- --
Issuance of common stock to vendor of former business 135,000 -- --
Issuance of common stock in offering penalty 98,550 -- --
Changes in assets and liabilities, net of effect of
acquisitions:
Accounts receivable (11,187,538) (5,731,830) 1,205,807
Other assets (887,891) (160,903) (133,499)
Accounts payable and accrued expenses 4,771,653 2,176,634 (203,061)
Discontinued operations - working capital changes and
non-cash items -- -- 13,025,075
--------------- --------------- ---------------
Net cash used in operating activities (3,988,605) (583,267) (502,992)
--------------- --------------- ---------------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (9,385,908) (10,497,306) (18,011,262)
Purchases of furniture and equipment (4,183,201) (1,812,750) (280,670)
Proceeds from sale of furniture and equipment -- -- 32,926
Loans made (130,000) (350,000) --
Payment of earn-out (2,206,715) -- --
Discontinued operations:
Investment in and advances to affiliate companies -- -- (752,000)
Collections on advances to affiliate companies -- -- 1,000,000
Purchase of available for sale securities -- -- (452,900)
Proceeds from sale of available for sale securities -- -- 57,910
Proceeds from sale of ownership interests in
affiliate companies -- 115,000 6,285,953
--------------- --------------- ---------------
Net cash used in investing activities (15,905,824) (12,545,056) (12,120,043)
--------------- --------------- ---------------
Cash flows from financing activities:
Issuance of common stock 18,185,415 -- --
Payment of equity financing fees -- (25,000) --
Payment of debt financing fees -- (233,580) --
Net repayments on short-term debt -- -- (1,448,786)
Proceeds from financing of equipment 2,049,638 -- --
Principal payments on capital lease (265,178) -- --
Proceeds related to minority interest in subsidiary 81,818 -- --
Proceeds from issuance of common stock upon exercise of
options and warrants 650,779 425,181 200,000
--------------- --------------- ---------------
Net cash provided by (used in) financing
activities 20,702,472 166,601 (1,248,786)
--------------- --------------- ---------------
Net increase (decrease) in cash and cash
equivalents 808,043 (12,961,722) (13,871,821)
Cash and cash equivalents, beginning of year 2,266,108 15,227,830 29,099,651
--------------- --------------- ---------------
Cash and cash equivalents, end of year $ 3,074,151 $ 2,266,108 $ 15,227,830
=============== =============== ===============
Cash paid for interest $ 189,359 $ -- $ 4,102
=============== =============== ===============
Cash paid for income taxes $ 373,832 $ 84,959 $ --
=============== =============== ===============
Supplemental disclosure of non-cash investing and
financing activities:
Issuance of common stock in satisfaction of earn-out $ 403,000 $ -- $ --
=============== =============== ===============
Increase in goodwill related to accrued earn-out
payments $ 3,636,034 $ 2,697,215 $ --
=============== =============== ===============
Issuance of warrants in connection with private
placement $ -- $ 95,000 $ --
=============== =============== ===============
Offset of related party loan against earn-out $ 87,500 $ 87,500 $ --
=============== =============== ===============
Issuance of common stock in connection with acquisitions $ 4,144,094 $ -- $ --
=============== =============== ===============
See accompanying notes to consolidated financial statements.
66
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2003, 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 21 major metropolitan areas in North
America, Puerto Rico and ten strategic locations in Asia, as well as an
extensive network of independent carriers and service partners
strategically located around the world.
(2) 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 and
majority owned subsidiaries. All intercompany balances and transactions
have been eliminated in consolidation. The Company's foreign
subsidiaries are included in the consolidated financial statements on a
one month lag to facilitate timely reporting. The Company does not have
any variable interest entities whose financial results are not included
in the consolidated financial statements.
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 revenue and expenses during the reporting period. Such
estimates include accruals for the cost of purchased transportation, 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.
67
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
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, 2003, 2002 and 2001, the Company's
largest customer, a national retail chain, accounted for approximately
24%, 33% and 53% of revenue, respectively, and approximately 16% and 27%
of the accounts receivable balance as of December 31, 2003 and 2002,
respectively. No other customer accounted for greater than 10% of
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.
Under the provisions of Statement of Position 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use, the
Company capitalizes costs associated with internally developed and/or
purchased software systems that have reached the application development
stage and meet recoverability tests. Capitalized costs include external
direct costs of materials and services utilized in developing or
obtaining internal-use software, payroll and payroll-related expenses
for employees who are directly associated with and devote time to the
internal-use software project and capitalized interest, if appropriate.
Capitalization of such costs begins when the preliminary project stage
is complete and ceases no later than the point at which the project is
substantially complete and ready for its intended purpose.
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).
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 effective October 1, 2003 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.
68
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
g) Long-Lived Assets
Acquired intangibles consist of customer related intangibles and
non-compete agreements arising from the Company's acquisitions. Customer
related intangibles are amortized using accelerated methods over five to
seven years and non-compete agreements are amortized using the straight
line method over periods of three to five years.
The Company follows the provisions of SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which 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.
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 revenue 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 revenue 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.
Based on the terms in the contract of carriage, revenue related to
shipments where the Company issues a house bill of lading is 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 revenue, including revenue for customs brokerage and
warehousing and other value added services, is recognized upon
completion of the service.
69
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
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 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.
RESTATED RESTATED RESTATED
Year ended December 31: 2003 2002 2001
--------------------------------------------------- -------------- -------------- --------------
Net income (loss) attributable to common
stockholders:
As reported $ (785,603) $ 15,473,744 $ (21,610,290)
Add: stock-based employee compensation expense
included in reported net income (loss) 95,232 92,566 5,713,168
Deduct: total stock-based compensation expense
determined under fair value method for all
awards (2,306,736) (1,922,051) (10,040,316)
-------------- -------------- --------------
Pro forma $ (2,997,107) $ 13,644,259 $ (25,937,438)
============== ============== ==============
Basic earnings (loss) per common share:
As reported $ (0.03) $ 0.70 $ (1.06)
Pro forma (0.10) 0.62 (1.26)
Diluted earnings (loss) per common share:
As reported $ (0.03) $ 0.02 $ (1.06)
Pro forma (0.10) (0.05) (1.26)
The weighted average fair value of employee options granted during 2003,
2002 and 2001 was $1.05, $0.89 and, $0.53 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 2003 2002 2001
---------------------------------- ----------- ----------- -----------
Dividend yield None None None
Expected volatility 55.8% 93.8% 106.7%
Average risk free interest rate 1.56% 1.36% 3.99%
Average expected lives 6.9 years 6.8 years 4.3 years
70
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
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 365,592, 1,336,825 and 9,755,934
for the years ended December 31, 2003, 2002 and 2001, respectively.
During the year ended December 31, 2001, 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
related to continuing operations for the years ended December 31, 2003
and 2002:
RESTATED
RESTATED PER SHARE
AMOUNTS SHARES AMOUNT
------------ ------------ ------------
YEAR ENDED DECEMBER 31, 2003:
BASIC EARNINGS PER COMMON SHARE
Loss from continuing operations $ (522,572) 29,625,585 $ (0.02)
============
EFFECT OF DILUTIVE SECURITIES
Options and warrants -- --
Convertible preferred stock -- --
------------ ------------
DILUTED EARNINGS PER COMMON SHARE
Loss from continuing operations
attributable to common stockholders plus
assumed conversions $ (522,572) 29,625,585 $ (0.02)
============ ============ ============
YEAR ENDED DECEMBER 31, 2002:
Income from continuing operations $ 453,596
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
Income from continuing operations attributable
to common stockholders 15,473,744 22,154,861 $ 0.70
============
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 $ 453,596 29,232,568 $ 0.02
============ ============ ============
71
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
l) New Accounting Pronouncements
In January 2003 (and revised in December 2003), the Financial Accounting
Standards Board issued Interpretation No. 46, Consolidation of Variable
Interest Entities, which provides new guidance with respect to the
consolidation of certain previously unconsolidated entities, including
special purpose entities. The adoption of Interpretation No. 46 in 2003
did not have a material impact on the Company's consolidated financial
statements.
m) Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year presentation.
(3) Restatement of Previously Reported Consolidated Financial Statements
On September 20, 2004, the Company announced that its consolidated
financial statements for 2003 and the first and second quarters of 2004
could not be relied upon. This announcement resulted from the Company's
discovery of a material weakness in its procedures for the recognition
of purchased transportation costs, including differences between
estimated purchased transportation costs and actual costs incurred. This
understatement of purchased transportation costs together with
inappropriately recognized revenue, discussed below, had consequential
effects on income tax benefits recorded during the periods and on
earn-out payments, which proved to be in excess of amounts actually
owed.
In the course of its review of the under accrual of purchased
transportation, the Company also identified a process error related to
revenue transactions within the Domestic Services segment. The error
resulted in the use of prices with one of its automotive customers
which had been approved by a customer representative who did not have
the authority to do so.
The Company has restated its consolidated financial statements as of
December 31, 2003 and 2002 and for each of the years in the three-year
period ended December 31, 2003 to correct the processing errors related
to its purchased transportation accrual, revenue recognition and to
reflect the related income tax effects. In addition, the amounts owed as
of December 31, 2003 and 2002 under various earn-out provisions have
been changed to reflect the impact of the restatement. The effects of
the restatement on previously reported consolidated financial statements
as of December 31, 2003 and 2002 and for each of the years in the
three-year period ended December 31, 2003 are summarized below.
December 31, 2003
-------------------------------
As Previously
Reported As Restated
-------------- --------------
Select Balance Sheet Data:
Accounts receivable $ 38,470,386 $ 38,250,610
Total current assets 43,775,834 43,556,058
Goodwill 35,764,211 31,508,931
Deferred income taxes 1,695,000 -
Total assets 96,438,811 90,268,755
Accounts payable 16,119,014 22,412,287
Earn-out payable 6,623,724 3,548,534
Accrued expenses 2,054,333 1,821,671
Total current liabilities 27,444,127 30,429,548
Deferred tax liability - 1,035,600
Total liabilities 28,578,942 32,599,963
Accumulated deficit (153,572,460) (163,763,537)
Total stockholders' equity 66,514,079 56,323,002
Total liabilities and
stockholders' equity 96,438,811 90,268,755
December 31, 2002
-------------------------------
As Previously
Reported As Restated
-------------- --------------
Select Balance Sheet Data:
Goodwill $ 20,311,150 $ 19,131,060
Total assets 55,165,515 53,985,425
Accounts payable 12,873,703 14,778,997
Earn-out payable 3,879,856 2,609,715
Accrued expenses 1,786,100 1,776,100
Total current liabilities 19,734,934 20,360,087
Deferred tax liability - 460,800
Total liabilities 19,734,934 20,820,887
Accumulated deficit (160,711,891) (162,977,934)
Total stockholders' equity 35,430,581 33,164,538
Total liabilities and
stockholders' equity 55,165,515 53,985,425
72
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
Year Ended December 31, 2003
----------------------------------
As Previously
Reported As Restated
--------------- ---------------
Select Statement of Operations Data:
Total revenue $ 220,303,966 $ 220,084,190
Cost of transportation 153,717,616 158,105,595
Net revenue 66,586,350 61,978,595
Income from operations 6,286,620 1,678,865
Provision for excess earn-out payments -- (1,270,141)
Income from continuing operations
before income taxes and minority
interest 6,278,520 400,624
Income tax expense (benefit) (1,311,252) 735,886
Income (loss) from continuing operations
before minority interest 7,589,772 (335,262)
Income (loss) from continuing operations 7,402,462 (522,572)
Net income (loss) 7,139,431 (785,603)
Net income (loss) attributable to common
stockholders 7,139,431 (785,603)
Basic earnings (loss) per common share:
Continuing operations $ 0.25 $ (0.02)
Earnings (loss) per common share 0.24 (0.03)
Diluted earnings (loss) per common share:
Continuing operations $ 0.19 $ (0.02)
Earnings (loss) per common share 0.18 (0.03)
Select Statement of Cash Flows Data:
Net income (loss) $ 7,139,431 $ (785,603)
Deferred income taxes (1,695,000) 574,800
Accounts receivable (11,407,314) (11,187,538)
Accounts payable and accrued expenses 606,336 4,771,653
Net cash used in operating activities (2,718,464) (3,988,605)
Payment of earn-out (3,476,856) (2,206,715)
Net cash used in investing activities (17,175,965) (15,905,824)
Year Ended December 31, 2002
----------------------------------
As Previously
Reported As Restated
--------------- ---------------
Select Statement of Operations Data:
Cost of transportation $ 84,477,430 $ 86,084,863
Net revenue 38,310,195 36,702,762
Income from operations 2,354,215 746,782
Income from continuing operations before
income taxes and minority interest 2,482,206 874,773
Income tax expense 101,877 421,177
Income from continuing operations before
minority interest 2,380,329 453,596
Income from continuing operations 2,380,329 453,596
Net income 2,380,329 453,596
Net income attributable to common
stockholders` 17,400,477 15,473,744
Basic earnings per common share:
Continuing operations $ 0.79 $ 0.70
Earnings per common share 0.79 0.70
Diluted earnings per common share:
Continuing operations $ 0.08 $ 0.02
Earnings per common share 0.08 0.02
Select Statement of Cash Flows Data:
Net income $ 2,380,329 $ 453,596
Deferred income taxes - 389,300
Accounts payable and accrued expenses 639,201 2,176,634
73
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
December 31, 2001
--------------------------------
As Previously
Reported As Restated
-------------- --------------
Select Statement of Operations Data:
Cost of transportation $ 9,740,774 $ 10,008,584
Net revenue 5,857,115 5,589,305
Loss from operations (4,551,777) (4,819,587)
Loss from continuing operations before income
taxes and minority interest (3,257,069) (3,524,879)
Income tax expense - 71,500
Loss from continuing operations before
minority interest (3,257,069) (3,596,379)
Loss from continuing operations (3,257,069) (3,596,379)
Net loss (17,119,782) (17,459,092)
Net loss attributable to common stockholders (21,270,980) (21,610,290)
Basic loss per common share:
Continuing operations $ (0.36) $ (0.38)
Loss per common share (1.04) (1.06)
Diluted loss per common share:
Continuing operations $ (0.36) $ (0.38)
Loss per common share (1.04) (1.06)
Select Statement of Cash Flows Data:
Net loss $ (17,119,782) $ (17,459,092)
Deferred income taxes - 71,500
Accounts payable and accrued expenses (470,871) (203,061)
The restatements referred to above also affect periods for which
earn-out payments were made to selling shareholders. At December 31,
2003 and 2002, earn-outs payable and subsequently paid to selling
shareholders exceeded amounts which would have been due had the
adjustments been recorded during the periods restated. The aggregate
over payments of $4,345,331 previously recorded as additional goodwill
have been eliminated from goodwill. The overpayment of $1,270,141
applicable to 2002 has been reclassified to other assets as of December
31, 2003, and, because of the differing interpretations of the stock
purchase agreements by the Company and the selling shareholders, has
been fully reserved for, with the charge included in other income
(expense) in the consolidated statement of operations for the year ended
December 31, 2003. Identical treatment will be effected in the financial
statements for the $3,075,190 in overpayments applicable to 2003 and
paid in 2004. The Company intends to pursue repayment, which will be
recorded as other income if and when received.
(4) Discontinued Operations
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 Company never recognized any revenue from its former business model.
During the second quarter of 2003, the
74
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
Company accrued a liability for $135,000 related to services rendered in
2000 by a consultant. The liability was satisfied in the third quarter
of 2003 through the issuance of common stock. Also during the second
quarter of 2003, a subtenant defaulted on the payment of sublease
rentals related to a property occupied by the Company's former business.
The Company accrued a liability for the remaining rental payments and
recognized a loss of approximately $239,000. During the fourth quarter
of 2003, the Company entered into a new sublease agreement and reduced
the rental liability by approximately $92,000, which represents the
amount of rentals to be received under the new agreement. The total loss
recognized related to discontinued operations in 2003, net of income
taxes, amounts to approximately $263,000, and is reflected as loss from
discontinued operations in the accompanying consolidated statement of
operations for the year ended December 31, 2003. Pre-tax operating
losses amounting to $13,862,713 are reflected in the accompanying
consolidated statements of operations as loss from discontinued
operations for the year ended December 31, 2001.
(5) Acquisitions
On June 20, 2003, the Company acquired, through its indirect wholly
owned subsidiary, Stonepath Logistics Government Services, Inc.
("SLGS"), the business of Regroup Express LLC, a Virginia limited
liability company ("Regroup") for $3,700,000 in cash and $1,000,000 of
the Company's common stock paid at closing, plus contingent
consideration of up to an additional $12,500,000 payable over a period
of five years based on the future financial performance of SLGS
following the acquisition. The members of Regroup may also be entitled
to an additional earn-out payment to the extent its pre-tax earnings
exceed $17,500,000 during the earn-out period. The Company used funds
from its credit facility with LaSalle Business Credit, Inc. for the cash
payment at the closing. The business acquired from Regroup provides
time-definite domestic and international transportation services
including air and ground freight forwarding, ocean freight forwarding,
major project logistics as well as local pick up and delivery services.
The customers of the acquired business include U.S. government agencies
and contractors, select companies in the retail industry and other
commercial businesses. The acquisition, which significantly enhances the
Company's presence in the Washington, D.C. market, was accounted for as
a purchase and accordingly, the results of operations and cash flows of
the business acquired from Regroup are included in the accompanying
consolidated financial statements prospectively from the date of
acquisition. The total purchase price, including acquisition costs of
$243,000, but excluding the contingent consideration, was $4,943,000.
The following table summarizes the allocation of the purchase price
based on the estimated fair value of the assets acquired at June 20,
2003 (in thousands):
Furniture and equipment $ 50
Other intangible assets 1,513
Goodwill 3,380
--------
Net assets acquired $ 4,943
--------
The acquired intangible assets have a weighted average useful life of
five years. The intangible assets include a customer related intangible
of $1,433,000 with a five year life and a covenant-not-to-compete of
$80,000 with a five year life. The $3,380,000 of goodwill was assigned
to the Company's domestic business unit and is deductible for income tax
purposes.
On August 8, 2003, through newly formed subsidiaries, the Company
acquired a 70% interest in the Singapore and Cambodia based operations
of the G-Link Group ("G-Link"), a regional logistics business
headquartered in Singapore with offices throughout Southeast Asia. As
consideration for the purchase, the Company paid $3,704,000 at closing
through a combination of $2,792,000 in cash, which was provided from
funds available under its credit facility, and $912,000 of the Company's
common stock and agreed to issue to G-Link a thirty percent interest in
the newly formed subsidiaries which acquired the operations. As
additional purchase price, on a post-closing basis, the Company paid
G-Link for 70% of its excess net assets in the amount of $1,516,000
through the issuance of additional common stock of the Company.
75
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
G-Link will also be entitled to an earn-out arrangement over a period of
four years of up to $2,500,000 contingent upon the future financial
performance of the business. The acquisition was accounted for as a
purchase and accordingly, the results of operations and cash flows of
G-Link are reflected in the Company's consolidated financial statements
for periods subsequent to the date of the transaction. The G- Link
acquisition facilitates the Company's expansion into a rapidly growing
region where most of the Company's customers have significant supplier
relationships. The total purchase price, including acquisition costs of
$495,000, but excluding the contingent consideration, was $5,715,000.
The following table summarizes the allocation of the purchase price
based on management's estimate of the fair value of assets acquired and
liabilities assumed at August 8, 2003 (in thousands):
Current assets $ 4,095
Furniture and equipment 81
Other intangible assets 994
Goodwill 3,065
---------
Total assets acquired 8,235
Current liabilities assumed (1,810)
Minority interest (710)
---------
Net assets acquired $ 5,715
=========
The acquired intangible assets have a weighted average life of 6.2
years. The intangible assets include a customer related intangible of
$917,000 with a 6.5 year life and a covenant-not-to-compete of $77,000
with a four year life. The $3,065,000 of goodwill was assigned to the
Company's international business unit and is deductible for income tax
purposes.
During 2003, the Company made several smaller acquisitions. The total
consideration for these acquisitions amounted to $3,826,000 consisting
of approximately $3,306,000 in cash and approximately $520,000 of the
Company's common stock paid at closing, plus contingent consideration of
up to an additional $6,157,000 payable over a period ending in 2009
based on the future financial performance of the acquired companies
following their acquisition. These companies, situated in Portland,
Maine, Miami, Florida, El Paso, Texas, Malaysia, Shanghai and Hong Kong
complement the Company's existing operations or expand its operations
into new geographical locations. The acquisitions were accounted for as
purchase transactions and accordingly, the results of operations and
cash flows of the acquired U.S.-based companies are included in the
consolidated financial statements prospectively from the date of
acquisition; the foreign-based companies will be included in the
consolidated financial statements prospectively from the date of
acquisition on a one month delay in accordance with the Company's
consolidation policies. In connection with these transactions, the
Company recorded intangible assets amounting to $780,000 and goodwill
amounting to $2,100,000 of which $886,000 is expected to be deductible
for income tax purposes.
76
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
The following unaudited pro forma information is presented as if the two
material acquisitions (Regroup and G-Link) had occurred on January 1,
2002 (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------
RESTATED RESTATED
2003 2002
---------- ----------
Total revenue $ 240,318 $ 156,640
Income from continuing operations 186 2,859
Net income (loss) (77) 2,859
Earnings per share:
Basic $ -- $ 0.76
Diluted $ -- $ 0.09
(6) Acquired Intangible Assets
Information with respect to acquired intangible assets is as follows:
DECEMBER 31,
---------------------------------------------------------
2003 2002
--------------------------- ---------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
------------ ------------ ------------ ------------
Amortizable intangible
assets:
Customer related $ 8,970,000 $ 2,923,033 $ 5,980,000 $ 1,533,667
Covenants-not-to-compete 1,119,000 390,074 760,000 163,778
------------ ------------ ------------ ------------
Total $ 10,089,000 $ 3,313,107 $ 6,740,000 $ 1,697,445
============ ============ ============ ============
Aggregate amortization expense:
For the year ended December 31, 2003 $ 1,615,662
===========
Estimated aggregate amortization expense:
For the year ended December 31, 2004 $ 1,782,053
For the year ended December 31, 2005 1,313,692
For the year ended December 31, 2006 1,100,666
For the year ended December 31, 2007 916,770
For the year ended December 31, 2008 727,845
77
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(7) Furniture and Equipment
Furniture and equipment consists of the following:
DECEMBER 31,
---------------------------
2003 2002
------------ ------------
Furniture and office equipment $ 3,396,048 $ 2,761,837
Computer software 5,006,495 986,942
Leasehold improvements 593,425 400,968
Vehicles 62,334 40,167
------------ ------------
9,058,302 4,189,914
Less: accumulated depreciation (1,995,346) (956,237)
------------ ------------
$ 7,062,956 $ 3,233,677
============ ============
(8) Revolving Credit Facility
In May 2002, the Company secured a $15,000,000 revolving credit facility
(the "Facility") which was increased to $20,000,000 during 2003. The
Facility is collateralized by accounts receivable and other assets of
the Company and its subsidiaries. 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. The Company may
use advances under the Facility to finance future acquisitions, capital
expenditures or other corporate purposes. Under the terms of the
Facility, the Company is permitted to make additional acquisitions
without the lender's consent only if certain conditions are satisfied.
The conditions imposed by the credit facility include the following: (1)
the absence of an event of default under the credit facility; (2) the
company to be acquired must be in the transportation and logistics
industry; (3) the purchase price to be paid must be consistent with the
Company's historical business and acquisition model; (4) the undrawn
availability under the credit facility must average $5,000,000 for the
60 days preceding the acquisition and must be at least $5,000,000 after
giving effect to the acquisition; (5) the lender must be reasonably
satisfied with projected financial statements covering a 12 month period
following the acquisition; (6) the acquisition documents must be
provided to the lender and must be consistent with the description of
the transaction provided to the lender; (7) through May 2005, the
aggregate cash consideration paid at the closing for foreign
acquisitions must not exceed $11,300,000 (such amount may be increased
up to $20,000,000 based on the results of subsequent equity offerings);
and (8) the number of such permitted acquisitions is limited to four per
year (excluding any acquisitions for which the purchase price is payable
solely in stock). Borrowings under the Facility may be limited based
upon measures of the Company's cash flow, as well as a covenant that
limits funded debt (the "Funded Debt Covenant") to a multiple of
consolidated earnings before interest, taxes, depreciation and
amortization generated from the operations of the United States
subsidiaries ("Domestic EBITDA"). Under the Funded Debt Covenant, the
funded debt is limited to a multiple of 2.75 of the Domestic EBITDA
measured on a rolling four quarter basis. As the rolling four quarter
Domestic EBITDA increases or decreases, the availability under the
Facility will increase or decrease. At December 31, 2003, based on
available collateral, $4,687,300 earmarked for foreign acquisitions, and
an outstanding $160,000 letter of credit commitment, there was
$15,152,700 available for borrowing under the Facility.
78
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
As discussed in Note 3, the Company restated its consolidated financial
statements as of December 31, 2003 and 2002 and for each of the years in
the three-year period ended December 31, 2003. Based upon the restated
consolidated financial statements, the Company was in technical default
of certain financial covenants of the Facility, as amended. These
defaults have been waived and the Company has entered into a further
amended revolving credit facility, dated November 17, 2004. This
amendment reduces the facility term from May 15, 2007 to January 31,
2006, reduces the maximum availability under the facility from
$25,000,000 to $22,500,000, establishes minimum quarterly EBITDA targets
for the Company and defined segments commencing in the quarter ending
December 31, 2004, precludes acquisitions, eliminates LIBOR based
borrowings, fixes the interest rate at the lender's prime rate plus 200
basis points and imposes semi-annual fees of approximately $125,000,
among other changes to the agreement.
During the year ended December 31, 2003, the Company incurred interest
costs of $189,359 of which $47,500 was capitalized.
(9) Income Taxes
Deferred tax assets and liabilities are determined based upon the
estimated future tax effects of temporary differences between the
financial statement and tax bases of assets and liabilities, as well as
for operating and capital loss carryforwards, using the current enacted
tax rates. 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,
-----------------------------
RESTATED RESTATED
2003 2002
------------- -------------
Deferred tax assets:
Accruals and reserves $ 191,000 $ 47,500
Equity in losses of affiliate companies 384,000 394,100
Depreciation and amortization 616,000 366,600
Deferred compensation and warrants 3,044,000 10,095,900
Capital loss carryforward 2,201,000 2,257,900
Federal and state deferred tax benefits
arising from net operating loss carryforwards 9,550,000 8,866,000
------------- -------------
Total gross deferred tax assets 15,986,000 22,028,000
Less: valuation allowance (15,986,000) (22,028,000)
------------- -------------
Net total deferred tax assets -- --
------------- -------------
Deferred tax liabilities:
Amortization of goodwill for tax purposes (985,600) (460,800)
Foreign taxes (50,000) --
------------- -------------
Total gross deferred tax liabilities (1,035,600) (460,800)
------------- -------------
Net deferred tax liabilities $ (1,035,600) $ (460,800)
============= =============
The Company has not recorded deferred income taxes on the undistributed
earnings of its foreign subsidiaries because it is management's
intention to reinvest such earnings for the foreseeable future. At
December 31, 2003, the undistributed earnings of the foreign
subsidiaries amounted to approximately
79
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
$784,000. Upon distribution of these earnings in the form of dividends
or otherwise, the Company may be subject to U.S. income taxes and
foreign withholding taxes. It is not practical, however, to estimate the
amount of taxes that may be payable on the eventual remittance of these
earnings.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization
of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which the temporary differences
become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income and tax
planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income,
management believes that a valuation allowance against the gross
deferred tax assets is appropriate.
The net change in the valuation allowance for the years ended December
31, 2003 and 2002 was a decrease of $6,042,000 and $2,122,000,
respectively. The decrease in 2003 was principally due to a reduction in
the amount of the deferred tax asset related to stock-based
compensation. As of December 31, 2003, the Company had net operating
loss carryforwards for federal and state income tax purposes amounting
to approximately $24,900,000 and $23,159,000, respectively. 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 attributable to continuing operations is as follows:
YEARS ENDED DECEMBER 31,
------------------------------------
RESTATED RESTATED RESTATED
2003 2002 2001
---------- ---------- ----------
Current:
Federal $ -- $ -- $ --
State 40,000 30,000 --
Foreign 121,086 1,877 --
---------- ---------- ----------
161,086 31,877 --
---------- ---------- ----------
Deferred
Federal 448,800 309,500 55,400
State 76,000 79,800 16,100
Foreign 50,000 -- --
---------- ---------- ----------
574,800 389,300 71,500
---------- ---------- ----------
$ 735,886 $ 421,177 $ 71,500
========== ========== ==========
In addition to the amounts reflected above, an income tax benefit of
approximately $19,000 has been allocated to discontinued operations for
the year ended December 31, 2003.
The following table reconciles income taxes based on the U.S. statutory
tax rate to the Company's income tax expense related to continuing
operations.
80
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
YEARS ENDED DECEMBER 31,
--------------------------------
RESTATED RESTATED RESTATED
2003 2002 2001
-------- -------- --------
Tax at statutory rate 34.0% 34.0% 34.0%
Amortization of goodwill 112.0 35.4 (1.6)
Change in valuation allowance 22.5 (44.0) (32.8)
State taxes 29.0 12.5 (0.5)
Effect of tax rates of foreign subsidiaries (39.1) (0.2) --
Non-deductible items 25.3 10.4 (1.1)
-------- -------- --------
Income tax expense 183.7% 48.1% (2.0)%
======== ======== ========
(10) Commitments
Employment Agreements
At December 31, 2003, 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. During 2003, the Company
entered into a capital lease for certain technology and hardware related
to its Tech-Logis(TM) project. Total rent expense related to continuing
operations for the years ended December 31, 2003, 2002 and 2001 was
$7,451,000, $4,750,000 and $969,000, respectively. Future minimum lease
payments are as follows:
OPERATING LEASES
---------------------------------------------
YEAR ENDING DECEMBER 31, THIRD-PARTY RELATED PARTY TOTAL CAPITAL LEASE
------------------------------- ------------- ------------- ------------- -------------
2004 $ 5,790,000 $ 187,000 $ 5,977,000 $ 749,703
2005 5,214,000 94,000 5,308,000 749,178
2006 3,708,000 -- 3,708,000 435,715
2007 2,614,000 -- 2,614,000 --
2008 1,722,000 1,722,000 --
Thereafter 1,151,000 -- 1,151,000 --
------------- ------------- ------------- -------------
Total minimum lease payments $ 20,199,000 $ 281,000 $ 20,480,000 1,934,596
============= ============= =============
Less: Amount representing interest 128,584
-------------
Present value of minimum lease payments 1,806,012
Less: Current portion of capital lease obligation 671,197
-------------
Long term portion of capital lease obligation $ 1,134,815
=============
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, 2003, 2002 and 2001, total Company
contributions amounted to $547,000, $260,000 and $37,500, respectively.
81
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(11) Contingencies
Acquisition Agreements
Assuming minimum pre-tax income levels are achieved by the acquired
companies, the Company will be required to make future contingent
consideration payments by April 1 of the respective year as follows (in
thousands):
2005 2006 2007 2008 2009 TOTAL
-------- -------- -------- -------- -------- --------
Domestic $ 9,040 $ 8,050 $ 2,500 $ 2,500 $ -- $ 22,090
International 2,804 2,804 3,176 1,442 909 11,135
-------- -------- -------- -------- -------- --------
Total $ 11,844 $ 10,854 $ 5,676 $ 3,942 $ 909 $ 33,225
======== ======== ======== ======== ======== ========
In addition, during the 2003-2008 earn-out period, there is an
additional contingent obligation related to tier-two earn-outs that
could be as much as $18,000,000 if certain of the acquired companies
generate an incremental $37,000,000 in pre-tax earnings. The above also
excludes $2,500,000 of contingent purchase price payable to the former
members of Regroup in the third quarter of 2004 subject to the acquired
operations achieving a $3,500,000 earnings target for the twelve-month
period commencing July 1, 2003.
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 did 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 District Court entered an order
granting the motion to dismiss Emergent's second amended complaint
against the Company and its former officers. The District 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. On September 4, 2003,
the Second Circuit Court of Appeals entered an order affirming in part,
82
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
vacating in part and remanding in part the matter to the District Court.
The Court affirmed the dismissal of some of the counts in the second
amended complaint and determined that Emergent had stated a claim on the
other counts. The Company has filed an answer denying liability to
Emergent and discovery on causation issues is proceeding. The Company
believes it has meritorious defenses to this action and intends to
continue to vigorously defend this matter. 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.
On May 6, 2003, the Company settled litigation instituted on August 20,
2000 by Austost Anstalt Schaan, Balmore Funds, S.A. and Amro
International, S.A. Although it was believed that the plaintiffs' claims
were without merit, the Company chose to settle the matter in order to
avoid future litigation costs and to mitigate the diversion of
management's attention from operations. The total settlement costs of
$787,500, paid $437,500 in cash and $350,000 in shares of the Company's
common stock, are included in litigation and nonrecurring costs in the
accompanying consolidated statement of operations for the year ended
December 31, 2003.
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.
One of the Company's customers which is the subject of a Chapter 11
proceeding under the Bankruptcy Code paid to the Company approximately
$1,300,000 of pre-petition indebtedness for shipping and delivery
charges pursuant to an order of a United States Bankruptcy Court
authorizing the payment of such charges. One of the creditors in the
Chapter 11 proceeding appealed other orders of the Bankruptcy Court
authorizing the payment of pre-petition indebtedness to other creditors
for other charges, and those orders have been reversed by a United
States District Court. The Company's customer has appealed the District
Court's reversal and that appeal is pending. While no action has been
taken in the Bankruptcy Court to challenge the payments made to the
Company, if such action were taken in the future and that action were
successful, the Company could be required to return all or a substantial
portion of the payments made by the customer.
(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.
In March 2003, the Company completed a private placement of 4,470,000
shares of its common stock at a price of approximately $1.35 per share
realizing gross proceeds of $6,072,500. This placement yielded net
proceeds of $5,512,468 for the Company, after the payment of placement
agent fees and other out-of-pocket costs associated with the placement.
In October 2003, the Company completed a private placement of 5,983,500
shares of its common stock at a price of $2.20 per share realizing gross
proceeds of $13,163,700. This placement yielded net proceeds of
$12,552,947 for the Company, after the payment of placement agent fees
and other out-of-pocket costs associated with the placement.
83
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
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 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.
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
2,692,195 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
307,805 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 307,805
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 158,349 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
84
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
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 income. The Series C Preferred Stock which was
converted into Series D Convertible Preferred Stock had a carrying value
of approximately $21,645,000. The Company obtained an independent
appraisal which valued the Series D Convertible Preferred Stock at
approximately $4,672,000. The excess of the carrying value of the Series
C Preferred Stock over the fair value of the Series D Convertible
Preferred Stock was added to net income for purposes of computing net
income attributable to common stockholders for the year ended December
31, 2002. The Exchange Transaction had no effect on the cash flows of
the Company.
The holders of the Series C Preferred Stock earned 162,741 and 299,069
additional shares of Series C Preferred Stock from payment of preferred
stock dividends during the years ended December 31, 2002 and 2001,
respectively.
Series D Convertible Preferred Stock
Each share of the Series D Convertible Preferred Stock is convertible
into ten shares of common stock of the Company. The conversion terms
were negotiated to be similar to the terms of the Exchange Transaction.
During the year ended December 31, 2003, 50,265 shares of Series D
Convertible Preferred Stock were converted into 502,650 shares of common
stock of the Company.
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:
YEAR ENDED, DECEMBER 31
-----------------------------
2002 2001
------------- -------------
Series C Preferred Stock dividend payable in kind $ (1,952,892) $ (3,588,828)
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)
------------- -------------
$ 15,020,148 $ (4,151,198)
============= =============
85
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2003, 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 January 1, 2001 $ 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
Amortization to stock-based compensation (95,232) -- (95,232)
-------------- -------------- --------------
Balance at December 31, 2003 $ 21,174 $ -- $ 21,174
============== ============== ==============
Stock-based compensation is reflected in the accompanying consolidated
statements of operations as follows:
YEARS ENDED DECEMBER 31,
------------------------------------------------
2003 2002 2001
-------------- -------------- --------------
Personnel costs $ 95,232 $ 98,425 $ 2,394,106
Loss from discontinued operations - - 3,320,683
-------------- -------------- --------------
Total $ 95,232 $ 98,425 $ 5,714,789
============== ============== ==============
(13) Stock Options and Warrants
a) Stock Options
The Amended and Restated Stonepath Group, Inc. 2000 Stock Incentive
Plan, (the "Stock Incentive Plan") covers 13,000,000 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.
86
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
The following summarizes the Company's stock option activity and related
information:
WEIGHTED
RANGE OF AVERAGE
EXERCISE EXERCISE
SHARES PRICES PRICE
-------------- -------------- --------------
Outstanding at January 1, 2001 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
Granted 1,862,100 1.53 - 2.85 1.95
Exercised (307,916) 0.70 - 1.30 1.04
Expired (273,600) 9.27 -10.00 9.27
Cancelled (123,750) 1.21 - 2.00 1.34
--------------
Outstanding at December 31, 2003 10,604,134 $ 0.50 -17.50 $ 1.36
==============
The following table summarizes information about options outstanding and
exercisable as of December 31, 2003:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
---------------------------------------------------- ----------------------------------
WEIGHTED AVERAGE
REMAINING
RANGE OF NUMBER CONTRACTUAL WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
---------------- --------------- ---------------- ---------------- --------------- ----------------
$0.50 - $1.00 4,865,834 6.8 years $ 0.82 4,726,605 $ 0.82
$1.01 - $2.00 4,602,100 8.7 years 1.46 1,624,270 1.45
$2.01 - $4.00 1,063,000 8.5 years 2.40 450,222 2.67
$6.38 10,000 5.5 years 6.38 10,000 6.38
$17.50 63,200 3.7 years 17.50 63,200 17.50
--------------- ---------------
Total 10,604,134 7.8 years $ 1.36 6,874,297 $ 1.25
=============== ===============
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.
87
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
b) Warrants
The Company had outstanding the following warrants to purchase its
securities as of December 31, 2003:
NUMBER OF EXERCISE PRICE
DESCRIPTION OF SERIES WARRANTS ISSUED PER SHARE
--------------------------------- ---------------- ----------------
Common stock 1,883,396 $1.00 - $1.49
================ ================
These warrants were issued primarily in connection with former borrowing
arrangements, the Series C Preferred Stock issuance, the receipt of
consulting services and services to be rendered in connection with a
private placement of the Company's common stock. 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, 2003 and 2002, 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. At December 31, 2003, the carrying
value of the capital lease approximated its fair value, which was
determined using the interest rate currently available to the Company
for issuance of debt with similar terms and remaining maturities.
(15) Related Party Transactions
Certain real estate is leased from the former principal shareholder of
Air Plus under an operating lease. The Company leased one building in
2003 and 2002 and two buildings in 2001. Rent under this arrangement was
determined by a survey of comparable building rents and totaled $187,000
for each of the years ended December 31, 2003 and 2002 and $110,000 for
the period from October 5, 2001 to December 31, 2001.
During 2003, the Company paid $25,872 for consulting services received
from a company owned by a director.
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, 2003 and 2002, an officer was indebted to the Company
for a loan with an aggregate unamortized balance of $14,597 and $39,593,
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.
At December 31, 2003, a former principal shareholder of Global was
indebted to the Company for a loan amounting to $175,000. The loan is
repayable in two equal installments by offset against his portion of the
contingent consideration payment.
88
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(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
identifies operating segments based on the principal service provided by
the business unit. The Company determined that it has two operating
segments: the Domestic Services platform, which provides a full range of
logistics and transportation services throughout North America, and its
International Services platform, which provides international air and
ocean logistics services. Each segment has a separate management
structure. The accounting policies of the reportable segments are the
same as described in Note 2. Segment information, in which corporate
expenses (other than the legal settlement and non-recurring costs) have
been fully allocated to the operating segments, is as follows (in
thousands):
YEAR ENDED DECEMBER 31, 2003
-----------------------------------------------------------------
RESTATED
DOMESTIC INTERNATIONAL RESTATED
SERVICES SERVICES CORPORATE TOTAL
-------------- -------------- -------------- --------------
Revenue from external customers $ 129,474 $ 90,610 $ -- $ 220,084
Inter-segment revenue 56 124 -- 180
Revenue from significant customer 53,852 -- -- 53,852
Segment operating income (loss) (1,465) 4,312 (1,169) 1,678
Segment assets 49,780 36,577 3,912 90,269
Segment goodwill 19,641 11,868 -- 31,509
Depreciation and amortization 2,259 401 -- 2,660
Capital expenditures 643 140 3,400 4,183
YEAR ENDED DECEMBER 31, 2002
-----------------------------------------------------------------
RESTATED
DOMESTIC INTERNATIONAL RESTATED
SERVICES SERVICES CORPORATE TOTAL
-------------- -------------- -------------- --------------
Revenue from external customers $ 78,319 $ 44,469 $ -- $ 122,788
Inter-segment revenue 76 15 -- 91
Revenue from significant customer 40,164 -- -- 40,164
Segment operating income (loss) (1,023) 1,770 -- 747
Segment assets 40,682 13,867 (564) 53,985
Segment goodwill 13,923 5,208 -- 19,131
Depreciation and amortization 2,036 151 -- 2,187
Capital expenditures 788 349 676 1,813
89
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
The revenue in the table below is allocated to geographic areas based
upon the location of the customer (in thousands):
YEAR ENDED DECEMBER 31,
------------------------------------
Restated
2003 2002 2001
---------- ---------- ----------
Total revenue:
United States $ 208,591 $ 121,111 $ 15,598
Asia 8,003 1,076 --
North America (excluding the United States) 1,360 55 --
Europe 1,287 344 --
Other 843 202 --
---------- ---------- ----------
Total $ 220,084 $ 122,788 $ 15,598
========== ========== ==========
90
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(17) Quarterly Information (Unaudited)
The following is a summary of certain unaudited quarterly financial
information for fiscal 2003 and 2002:
QUARTER ENDED
-----------------------------------------------------------------
RESTATED RESTATED RESTATED RESTATED
2003 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------------------------------- -------------- -------------- -------------- --------------
Total revenue $ 38,572,441 $ 46,333,898 $ 65,507,874 $ 69,669,977
Cost of transportation 26,634,489 34,392,588 47,554,483 49,524,035
-------------- -------------- -------------- --------------
Net revenue $ 11,937,952 $ 11,941,310 $ 17,953,391 $ 20,145,942
============== ============== ============== ==============
Income (loss) from continuing
operations $ (1,656,934) $ (1,792,020) $ 1,307,951 $ 1,618,431
Gain (loss) from discontinued
operations -- (354,991) -- 91,960
-------------- -------------- -------------- --------------
Net income (loss) attributable
to common stockholders $ (1,656,934) $ (2,147,011) $ 1,307,951 $ 1,710,391
============== ============== ============== ==============
Earnings (loss) per common
share:
Basic
Continuing operations $ (0.07) $ (0.06) $ 0.04 $ 0.05
Discontinued operations -- (0.01) -- --
-------------- -------------- -------------- --------------
Earnings per common share $ (0.07) $ (0.07) $ 0.04 $ 0.05
============== ============== ============== ==============
Diluted
Continuing operations $ (0.07) $ (0.06) $ 0.03 $ 0.04
Discontinued operations -- (0.01) -- --
-------------- -------------- -------------- --------------
Earnings per common share $ (0.07) $ (0.07) $ 0.03 $ 0.04
============== ============== ============== ==============
QUARTER ENDED
-----------------------------------------------------------------
RESTATED RESTATED RESTATED RESTATED
2002 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------------------------------- -------------- -------------- -------------- --------------
Total revenue $ 13,065,560 $ 28,524,745 $ 37,881,049 $ 43,316,271
Cost of transportation 10,372,507 19,008,164 26,282,940 30,421,252
-------------- -------------- -------------- --------------
Net revenue $ 2,693,053 $ 9,516,581 $ 11,598,109 $ 12,895,019
============== ============== ============== ==============
Net income (loss) $ (2,948,417) $ 848,801 $ 1,534,489 $ 1,018,723
Preferred stock dividends and
effect of redemption (887,772) (892,116) 16,800,036 --
-------------- -------------- -------------- --------------
Net income (loss) attributable
to common stockholders $ (3,836,189) $ (43,315) $ 18,334,525 $ 1,018,723
============== ============== ============== ==============
Earnings (loss) per common
share(1):
Basic $ (0.18) $ -- $ 0.80 $ 0.04
============== ============== ============== ==============
Diluted $ (0.18) $ -- $ 0.05 $ 0.03
============== ============== ============== ==============
----------
(1) Includes effect of preferred stock dividends and effect of redemption
91
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(18) Subsequent Events
On February 9, 2004 the Company filed a shelf registration statement
with the Securities and Exchange Commission. This registration
statement, filed on Form S-3, has been declared effective, and permits
the Company to sell, in one or more public offerings, shares of common
stock, preferred stock, or warrants for proceeds of up to an aggregate
amount of $50,000,000.
On February 9, 2004, the Company entered into a definitive agreement to
acquire a 55% interest in Shanghai-based Shaanxi Sunshine Cargo Services
International Co. Ltd. ("Shaanxi"). This transaction is scheduled to
take effect as of March 1, 2004. Shaanxi is a Class A freight forwarder
which provides its clients with a wide range of customized
transportation and logistics services and supply chain solutions
including global freight forwarding, warehousing and distribution,
shipping services and special freight handling. With this and other
recent acquisitions in Hong Kong, Singapore and Malaysia, the Company is
in a position to deliver a broad range of supply-chain strategies to its
clients on a global basis and to take advantage of the increasing demand
for integrated logistics services between the U.S. and Asia and other
key markets. This acquisition will be accounted for as a purchase.
Shaanxi reported revenue of $55,000,000 for the ten-month period ended
October 31, 2003. The transaction is valued at up to $11,000,000,
consisting of cash of $3,500,000 and stock of $2,000,000 at closing, and
a five-year earn-out arrangement based upon the future financial
performance of Shaanxi. The earn-out payments due will be up to
$5,500,000 ($1,100,000 per year) contingent upon Shaanxi realizing
pre-tax income of at least $4,000,000 per year during the earn-out
period. As additional purchase price, on a post-closing basis, the
Company has also agreed to pay for excess closing date working capital
estimated at between $1,000,000 and $2,000,000. The following table
summarizes the allocation of the purchase price, which is preliminary
pending the finalization of the valuation of certain intangible assets
and the completion of the final balance sheet as of the transaction date
(in thousands):
Current assets $ 16,691
Furniture and equipment 89
Goodwill and intangible assets 5,650
------------
Total assets acquired 22,430
Current liabilities assumed (14,844)
Minority interest (871)
------------
Net assets acquired $ 6,715
============
Effective November 17, 2004, the Company amended the Facility (the
"Amended Facility") with its lender in connection with securing waivers
to the technical default resulting from the restatement of the Company's
consolidated financial statements as of December 31, 2003 and 2002 and
for each of the years in the three-year period ended December 31, 2003.
See Note 8 for a summary of the changes in the Amended Facility.
The Company has been named as a defendant in eight purported class
action complaints filed in the United States Court for the Eastern
District of Pennsylvania between September 24, 2004 and November 19,
2004. Also named as defendants in these actions are officers Dennis L.
Pelino and Thomas L. Scully and former officer Bohn H. Crain. These
cases have now been consolidated for all purposes in that Court under
the caption In re Stonepath Group, Inc. Securities Litigation, Civ.
Action No. 04-4515. The plaintiffs seek to represent a class of
purchasers of the Company's shares between May 7, 2003 and September 20,
2004, and allege claims for securities fraud under Sections 10(b) and
20(a) of the Securities Exchange Act of 1934. These claims are based
upon the allegation that certain public statements made during the
period from May 7,
92
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
2003 through August 9, 2004 were materially false and misleading because
they failed to disclose that the Company's Domestic Services operations
had improperly accounted for accrued purchased transportation costs. The
plaintiffs are seeking compensatory damages, attorneys' fees and costs,
and further relief as may be determined by the Court. The Court's order
consolidating the eight lawsuits envisions that the plaintiffs will file
a consolidated amended complaint, which has not yet occurred. The
Company and the individual defendants believe that the plaintiffs'
claims are without merit and intend to vigorously defend against them.
The Company has been named as a nominal defendant in a shareholder
derivative action on behalf of the Company that was filed on October 12,
2004 in the United States District Court for the Eastern District of
Pennsylvania under the caption Ronald Jeffrey Neer v. Dennis L. Pelino,
et al., Civ. A. No. 04-cv-4971. Also named as defendants in the action
are all of the individuals who were serving as directors of the Company
when the complaint was filed (Dennis L. Pelino, J. Douglas Coates,
Robert McCord, David R. Jones, Aloysius T. Lawn and John H. Springer),
former directors Andrew Panzo, Lee C. Hansen, Darr Aley, Stephen George,
Michela O'Connor-Abrams and Frank Palma, officer Thomas L. Scully, and
former officers Bohn H. Crain and Stephen M. Cohen. The derivative
action alleges breach of fiduciary duty, abuse of control, gross
mismanagement, waste of corporate assets, unjust enrichment and
violations of the Sarbanes-Oxley Act of 2002. These claims are based
upon the allegation that the defendants knew or should have known that
the Company's public filings for fiscal years 2001, 2002 and 2003 and
for the first and second quarters of fiscal year 2004, and certain press
releases and public statements made during the period from May 7, 2003
through August 9, 2004, were materially misleading because they failed
to disclose that the Company's Domestic Services operations had
improperly accounted for accrued purchased transportation costs. The
derivative action seeks compensatory damages in favor of the Company,
attorneys' fees and costs, and further relief as may be determined by
the Court. The defendants believe that this action is without merit,
have filed a motion to dismiss this action, and intend to vigorously
defend themselves against the claims raised in this action.
The Company has received notice that the Securities and Exchange
Commission ("Commission") is conducting an informal inquiry to determine
whether certain provisions of the federal securities laws have been
violated in connection with the Company's accounting and financial
reporting. As part of the inquiry, the staff of the Commission has
requested information relating to the restatement amounts, personnel at
the Air Plus subsidiary and Stonepath Group, Inc. and additional
background information for the period from October 5, 2001 to December
2, 2004. The Company intends to voluntarily cooperate with the staff.
93
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
Stonepath Group, Inc.:
Under date of February 24, 2004, except as to Note 3, the second paragraph of
Note 8 and the last four paragraphs of Note 18, which are as of January 31,
2005, we reported on the consolidated balance sheets of Stonepath Group, Inc.
and subsidiaries as of December 31, 2003 and 2002, 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,
2003. In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related financial statement schedule as listed
in the accompanying index. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such 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 3 to the consolidated financial statements, the Company has
restated its consolidated financial statements as of December 31, 2003 and 2002
and for each of the years in the three-year period ended December 31, 2003.
/s/ KPMG LLP
Philadelphia, Pennsylvania
January 31, 2005
94
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
STONEPATH GROUP, INC. AND SUBSIDIARIES
COLUMN C - ADDITIONS
-----------------------------
(1) (2)
COLUMN B - 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(A) END OF PERIOD
---------------------------------------- ------------- ------------- ------------- ------------- -------------
Allowance for doubtful accounts:
Year ended December 31, 2003 $ 320,000 $ 771,000 $ -- $ (36,000) $ 1,055,000
============= ============= ============= ============= =============
Year ended December 31, 2002 $ 167,000 $ 153,000 $ -- $ -- $ 320,000
============= ============= ============= ============= =============
Year ended December 31, 2001 $ -- $ 167,000 $ -- $ -- $ 167,000
============= ============= ============= ============= =============
Reserve for excess earn-out payments:
Year ended December 31, 2003 $ -- $ 1,270,141 $ -- $ -- $ 1,270,141
============= ============= ============= ============= =============
(a) Represents writeoff of uncollectible accounts receivable.
95
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this 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 February 9, 2005.
STONEPATH GROUP, INC.
BY: /s/ Jason Totah
------------------------------------------
Jason Totah (Chief Executive Officer)
BY: /s/ Thomas L. Scully
------------------------------------------
Thomas L. Scully (Chief Financial Officer,
Vice President and Controller)
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 February 9, 2005
--------------------
Dennis L. Pelino
/s/ J. Douglass Coates Director February 9, 2005
----------------------
Douglass Coates
/s/ John Springer Director February 9, 2005
-----------------
John Springer
/s/ David R. Jones Director February 9, 2005
------------------
David R. Jones
/s/ Aloysius T. Lawn, IV Director February 9, 2005
------------------------
Aloysius T. Lawn, IV
/s/ Robert McCord Director February 9, 2005
-----------------
Robert McCord
96