UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2004
[_] 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 Identification No.)
incorporation or organization)
1600 Market Street, Suite 1515
Philadelphia, PA 19103
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (215) 979-8370
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |__|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |__|
There were 41,769,472 issued and outstanding shares of the registrant's common
stock, par value $.001 per share, at July 31, 2004.
STONEPATH GROUP, INC.
INDEX
Page
----
Part I. FINANCIAL INFORMATION.................................................................................1
Item 1. Financial Statements (Unaudited)......................................................................1
Condensed Consolidated Balance Sheets
June 30, 2004 (Restated) and December 31, 2003........................................................1
Consolidated Statements of Operations
Three and Six months ended June 30, 2004 (Restated) and 2003 (Restated)...............................2
Consolidated Statements of Cash Flows
Six months ended June 30, 2004 (Restated) and 2003 (Restated).........................................3
Notes to Unaudited Consolidated Financial Statements..................................................4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations...........................................................................................17
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........................................34
Item 4. Controls and Procedures..............................................................................34
Part II. OTHER INFORMATION....................................................................................37
Item 1. Legal Proceedings....................................................................................37
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities.......................................................................38
Item 3. Defaults Upon Senior Securities......................................................................39
Item 4. Submission of Matters to a Vote of Security Holders..................................................39
Item 5. Other Information....................................................................................39
Item 6. Exhibits and Reports on Form 8-K.....................................................................40
SIGNATURES...................................................................................................42
i
Introductory Note
On September 20, 2004, Stonepath Group, Inc. (the "Company") announced that its
financial statements for 2003 and the first and second quarters of 2004 needed
to be restated and should not be relied upon. On February 11, 2005, the Company
filed its Form 10-K/A for the year ended December 31, 2003 which included
restated 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. This
Form 10-Q/A reflects restated amounts as of June 30, 2004 and December 31, 2003
and for the three- and six-month periods ended June 30, 2004 and 2003, together
with a description of events occurring subsequent to the filing of the Form 10-Q
for the second quarter of 2004 related to such restatement. Accordingly, all
notes to the financial statements are as of June 30, 2004 unless otherwise
indicated. In addition, Item 2 of Part I, Management's Discussion and Analysis
of Financial Condition and Results of Operations, has been updated as has Item 4
of Part I, Controls and Procedures.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
STONEPATH GROUP, INC.
Condensed Consolidated Balance Sheets
(UNAUDITED)
June 30, 2004 December 31, 2003
------------- -----------------
Restated
(See Note 2) (See Note 2)
Assets
Current assets:
Cash $ 1,304,354 $ 3,074,151
Accounts receivable, net 58,037,946 38,250,610
Other current assets 2,481,177 2,231,297
------------- ------------
Total current assets 61,823,477 43,556,058
Goodwill and acquired intangibles, net 42,794,487 38,284,824
Furniture and equipment, net 9,786,966 7,062,956
Other assets 1,500,993 1,364,917
------------- ------------
Total assets $ 115,905,923 $ 90,268,755
============= ============
Liabilities and Stockholders' Equity
Current liabilities:
Line of credit - bank $ 12,225,100 $ -
Accounts payable 39,208,113 22,412,287
Accrued expenses 6,401,700 3,797,530
Earn-out payable 117,249 3,584,534
Capital lease obligations 813,686 671,197
------------ -------------
Total current liabilities 58,765,848 30,429,548
Capital lease obligations, net of current portion 1,031,497 1,134,815
Other long term liabilities 181,063 -
Deferred tax liability 1,277,600 1,035,600
------------- ------------
Total liabilities 61,256,008 32,599,963
------------- ------------
Minority interest 3,416,448 1,345,790
------------- ------------
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares authorized;
Series D Convertible, issued and outstanding: 161,184 and
310,480 shares at 2004 and 2003, respectively 161 310
Common stock, $.001 par value, 100,000,000 shares authorized;
issued and outstanding: 41,032,974 and 37,449,944 shares
at 2004 and 2003, respectively 41,033 37,450
Additional paid-in capital 222,041,271 220,067,956
Accumulated deficit (170,832,790) (163,763,537)
Accumulated other comprehensive income 49,892 1,997
Deferred compensation (66,100) (21,174)
------------- ------------
Total stockholders' equity 51,233,467 56,323,002
------------- ------------
Total liabilities and stockholders' equity $ 115,905,923 $ 90,268,755
============= ============
See accompanying notes to unaudited consolidated financial statements.
1
STONEPATH GROUP, INC.
Consolidated Statements of Operations
(UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- ----------------------------------
2004 2003 2004 2003
------------ ------------ ------------- ------------
Restated Restated Restated Restated
(See Note 2) (See Note 2) (See Note 2) (See Note 2)
Total revenue $ 86,469,712 $ 46,333,898 $ 146,694,102 $ 84,906,339
Cost of transportation 67,404,844 34,392,588 110,877,557 61,027,078
------------ ------------ ------------- ------------
Net revenue 19,064,868 11,941,310 35,816,545 23,879,261
Personnel costs 10,871,557 7,003,018 20,769,299 13,566,098
Other selling, general and
administrative costs 7,423,296 6,058,820 15,731,697 10,361,193
Depreciation and amortization 1,132,942 570,451 1,983,778 1,160,229
Litigation settlement - - - 750,000
------------ ------------ ------------- ------------
Loss from operations (362,927) (1,690,979) (2,668,229) (1,958,259)
Other income (expense)
Provision for excess earn-out payments - - (3,075,190) (1,270,141)
Interest expense (59,304) (4,561) (95,043) (2,134)
Other income (expense), net (19,776) 59,181 (35,284) 86,261
------------ ------------ ------------- ------------
Loss from continuing operations
before income tax expense
and minority interest (442,007) (1,636,359) (5,873,746) (3,144,273)
Income tax expense 444,371 155,661 643,471 304,682
------------ ------------ ------------- ------------
Loss from continuing operations
before minority interest (886,378) (1,792,020) (6,517,217) (3,448,955)
Minority interest 482,428 - 552,036 -
------------ ------------ ------------- ------------
Loss from continuing operations (1,368,806) (1,792,020) (7,069,253) (3,448,955)
Loss from discontinued operations, net of tax - (354,991) - (354,991)
------------ ------------ ------------- ------------
Net loss $ (1,368,806) $ (2,147,011) $ (7,069,253) $ (3,803,946)
============ ============ ============= ============
Basic loss per common share -
Continuing operations $ (0.03) $ (0.06) $ (0.17) $ (0.13)
Discontinued operations - (0.02) - (0.02)
------------ ------------ ------------- ------------
Basic loss per common share $ (0.03) $ (0.08) $ (0.17) $ (0.15)
============ ============ ============= ============
Diluted loss per common share -
Continuing operations $ (0.03) $ (0.06) $ (0.17) $ (0.13)
Discontinued operations - (0.02) - (0.02)
------------ ------------ ------------- ------------
Diluted Loss per common share $ (0.03) $ (0.08) $ (0.17) $ (0.15)
============ ============ ============= ============
Basic weighted average shares outstanding 40,476,681 28,410,129 39,072,856 26,597,540
============ ============ ============= ============
Diluted weighted average shares and share
equivalents outstanding 40,476,681 28,410,129 39,072,856 26,597,540
============ ============ ============= ============
See accompanying notes to unaudited consolidated financial statements.
2
STONEPATH GROUP, INC.
Consolidated Statements of Cash Flows
(UNAUDITED)
Six months ended June 30,
2004 2003
------------ ------------
Restated Restated
(See Note 2) (See Note 2)
Cash flows from operating activities:
Net income (loss) $ (7,069,253) $ (3,803,946)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Deferred income taxes 242,000 -
Depreciation and amortization 1,983,778 1,160,229
Minority interest in income of subsidiaries 552,036 -
Stock-based compensation 25,074 47,616
Issuance of common stock in litigation settlement - 350,000
Discontinued operations - issuance of common stock to consultant - 128,000
Other 10,450 -
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable (7,802,841) (4,311,691)
Other assets 103,020 (1,069,842)
Accounts payable and accrued expenses 9,301,286 2,441,977
------------ ------------
Net cash provided by (used in) operating activities (2,654,450) (5,057,657)
------------ ------------
Cash flows from investing activities:
Purchases of furniture and equipment (2,796,233) (3,905,048)
Acquisitions of businesses, net of cash acquired (6,741,230) (3,770,000)
Payment of earn-out (3,431,285) (2,206,715)
Loans made (75,000) (320,909)
------------ ------------
Net cash used in investing activities (13,043,748) (10,202,672)
------------ ------------
Cash flows from financing activities:
Proceeds from line of credit, net 12,225,100 5,618,000
Issuance of common stock, net of costs - 5,670,539
Issuance of common stock upon exercise of options and warrants 2,006,989 104,861
Proceeds from financing of equipment - 1,960,952
Principal payments on capital lease (351,583) -
------------ ------------
Net cash provided by financing activities 13,880,506 13,354,352
------------ ------------
Effect of foreign currency translation 47,895 -
------------ ------------
Net decrease in cash and cash equivalents (1,769,797) (1,905,977)
Cash and cash equivalents at beginning of period 3,074,151 2,266,108
------------ ------------
Cash and cash equivalents at end of period $ 1,304,354 $ 360,131
============ ============
Cash paid for interest $ 123,380 $ -
============ ============
Cash paid for income taxes $ 87,261 $ -
============ ============
Supplemental disclosure of non-cash investing and financing activities:
Increase in furniture and equipment and capital lease obligation $ 390,754 $ -
Increase in common stock from conversion of Series D preferred stock $ 149 $ -
Issuance of warrants for consulting services $ 70,000 $ -
Issuance of common stock in connection with exercise of options $ 200,240 $ -
Issuance of common stock in connection with acquisitions $ 100,000 $ 1,000,000
Issuance of common stock in connection with payment of earn-out $ - $ 443,300
See accompanying notes to unaudited consolidated financial statements.
3
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
June 30, 2004
(1) Nature of Operations and Basis of Presentation
Stonepath Group, Inc. and subsidiaries (the "Company") is a non-asset based
third-party logistics services company providing supply chain solutions on a
global basis. A full range of time-definite transportation and distribution
solutions is offered through the Company's Domestic Services platform, where the
Company manages and arranges the movement of raw materials, supplies, components
and finished goods for its customers. 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.
The accompanying unaudited consolidated financial statements were prepared in
accordance with generally accepted accounting principles for interim financial
information. Certain information and footnote disclosures normally included in
financial statements have been condensed or omitted pursuant to the rules and
regulations of the U.S. Securities and Exchange Commission (the "SEC") relating
to interim financial statements. These statements reflect all adjustments,
consisting only of normal recurring accruals, necessary to present fairly the
Company's financial position, operations and cash flows for the periods
indicated. While the Company believes that the disclosures presented are
adequate to make the information not misleading, these unaudited consolidated
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 2003. Interim operating
results are not necessarily indicative of the results for a full year because
our operating results are subject to seasonal trends when measured on a
quarterly basis. Our first and second quarters are likely to be weaker in both
revenues and earnings as compared with our other fiscal quarters, which we
believe is consistent with the operating results of other supply chain service
providers.
(2) Restatement
On February 11, 2005, the Company filed its Form 10-K/A for the year ended
December 31, 2003 which included restated 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. Those restated consolidated financial statements
reflected adjustments to purchased transportation costs, certain revenue
transactions, earn-out costs and resultant income tax effects. Such items also
impacted the first and second quarters of 2004. In connection with the
preparation of its consolidated financial statements for the year ended December
31, 2004, the Company has identified an understatement of certain claims
expenses amounting to $251,000 which pertained to the first quarter of 2004. The
accompanying consolidated financial statements as of June 30, 2004 and for the
three- and six-month periods ended June 30, 2004 and 2003 have been restated to
reflect the effect of these adjustments. The effects of these restatements on
previously reported consolidated financial statements as of June 30, 2004 and
for the three- and six-month periods ended June 30, 2004 and 2003 are summarized
below.
4
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
June 30, 2004
June 30, 2004
------------------------------
As Previously
Reported As Restated
------------- --------------
Select Balance Sheet Data:
Accounts receivable, net $ 58,889,451 $ 58,037,946
Other current assets 3,319,212 2,481,177
Total current assets 63,513,017 61,823,477
Goodwill and acquired intangibles, net 47,049,767 42,794,487
Furniture and equipment, net 9,827,316 9,786,966
Deferred taxes 1,453,000 -
Total assets 123,344,093 115,905,923
Accounts payable 31,731,433 39,208,113
Accrued expenses 6,080,835 6,401,700
Total current liabilities 50,968,303 58,765,848
Other long term liabilities - 181,063
Deferred tax liability - 1,277,600
Total liabilities 51,999,800 61,256,008
Accumulated deficit (154,138,412) (170,832,790)
Total stockholders' equity 67,927,845 51,233,467
Total liabilities and stockholders' equity 123,344,093 115,905,923
Three Months Ended June 30, 2004
--------------------------------
As Previously
Reported As Restated
------------- --------------
Select Statement of Operations Data:
Total revenue $ 87,226,679 $ 86,469,712
Cost of transportation 66,884,570 67,404,844
Net revenue 20,342,109 19,064,868
Depreciation and amortization 1,092,592 1,132,942
Income (loss) from continuing operations 954,664 (362,927)
Income (loss) from continuing operations before income tax expense
and minority interest 875,584 (442,007)
Income tax expense 174,207 444,371
Income (loss) from continuing operations before minority interest 701,377 (886,378)
Income (loss) from continuing operations 218,949 (1,368,806)
Net income (loss) 218,949 (1,368,806)
Basic earnings (loss) per common share:
Continuing operations $ 0.01 $ (0.03)
Earnings (loss) per common share 0.01 (0.03)
Diluted earnings (loss) per common share:
Continuing operations $ - $ (0.03)
Earnings (loss) per common share - (0.03)
5
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
June 30, 2004
Three Months Ended June 30, 2003
--------------------------------
As Previously
Reported As Restated
------------- --------------
Select Statement of Operations Data:
Cost of transportation $ 32,228,800 $ 34,392,588
Net revenue 14,105,098 11,941,310
Income (loss) from operations 472,809 (1,690,979)
Income (loss) from continuing operations before income tax expense
and minority interest 527,429 (1,636,359)
Income tax expense 42,995 155,661
Income (loss) from continuing operations before minority interest 484,434 (1,792,020)
Income (loss) from continuing operations 484,434 (1,792,020)
Net income (loss) 129,443 2,147,011
Basic earnings (loss) per common share:
Continuing operations $ 0.02 $ (0.06)
Earnings (loss) per common share - (0.08)
Diluted earnings (loss) per common share:
Continuing operations $ 0.01 $ (0.06)
Earnings (loss) per common share - (0.08)
Diluted weighted average shares and share equivalents outstanding 38,082,567 28,410,129
Six Months Ended June 30, 2004
------------------------------
As Previously
Reported As Restated
------------- --------------
Select Statement of Operations Data:
Total revenue $ 147,760,386 $ 146,694,102
Cost of transportation 109,694,144 110,877,557
Net revenue 38,066,242 35,816,545
Other selling, general and administrative costs 15,480,697 15,731,697
Depreciation and amortization 1,943,428 1,983,778
Loss from operations (127,182) (2,668,229)
Provision for excess earn-out payments - (3,075,190)
Loss from continuing operations before income tax expense (benefit)
and minority interest (257,509) (5,873,746)
Income tax expense (benefit) (243,593) 643,471
Loss from continuing operations before minority interest (13,916) (6,517,217)
Loss from continuing operations (565,952) (7,069,253)
Net loss (565,952) (7,069,253)
Basic earnings (loss) per common share:
Continuing operations $ (0.01) $ (0.17)
Earnings (loss) per common share (0.01) (0.17)
Diluted earnings (loss) per common share:
Continuing operations $ (0.01) $ (0.17)
Earnings (loss) per common share (0.01) (0.17)
Six Months Ended June 30, 2003
-------------------------------
As Previously
Reported As Restated
------------- --------------
Select Statement of Operations Data:
Cost of transportation $ 58,617,601 $ 61,027,078
Net revenue 26,288,738 23,879,261
Income (loss) from operations 451,218 (1,958,259)
Provision for excess earn-out payments - (1,270,141)
Loss from continuing operations before income tax expense
and minority interest 535,345 (3,144,273)
Income tax expense 58,216 304,682
Income (loss) from continuing operations before minority interest 477,129 (3,448,955)
Income (loss) from continuing operations 477,129 (3,448,955)
Net income (loss) 122,138 (3,803,946)
Basic earnings (loss) per common share:
Continuing operations $ 0.02 $ (0.13)
Earnings (loss) per common share - (0.15)
Diluted earnings (loss) per common share:
Continuing operations $ 0.01 $ (0.13)
Discontinued operations (0.01) (0.02)
Earnings (loss) per common share - (0.15)
Diluted weighted average shares and share equivalents outstanding 35,305,458 26,597,540
6
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
June 30, 2004
Six Months Ended June 30, 2004
------------------------------
As Previously
Reported As Restated
------------- --------------
Select Statement of Cash Flows Data:
Net loss $ (565,952) $ (7,069,253)
Depreciation and amortization 1,943,428 1,983,778
Accounts receivable (8,434,570) (7,802,241)
Other assets (735,010) 103,020
Accounts payable and accrued expenses 7,383,284 9,301,286
Net cash provided by (used in) operating activities 420,740 (2,654,450)
Payment of earn-out (6,506,475) (3,431,285)
Net cash used in investing activities (16,118,938) (13,043,748)
Six Months Ended June 30, 2003
------------------------------
As Previously
Reported As Restated
------------- --------------
Select Statement of Cash Flows Data:
Net income (loss) $ 122,138 $ (3,803,946)
Accounts payable and accrued expenses (213,966) 2,441,977
Net cash used in operating activities (3,787,516) (5,057,657)
Payment of earn-out (3,476,856) (2,206,715)
Net cash used in investing activities (11,472,813) (10,202,672)
(3) Stock-Based Compensation
The Company accounts for its employee stock option grants by applying the
intrinsic value method. The table below illustrates the effect on net income
(loss) and earnings (loss) per common share as if the fair value of options
granted had been recognized as compensation expense in accordance with the fair
value method.
Three months ended June 30, Six months ended June 30,
-------------------------------- ----------------------------------
Restated Restated Restated Restated
2004 2003 2004 2003
-------------------------------- ----------------------------------
Net loss as reported $ (1,368,806) $(2,147,011) $ (7,069,253) $(3,803,946)
Add: stock-based employee compensation expense
included in reported net income (loss) - 23,808 21,174 47,616
Deduct: total stock-based compensation expense
determined under the fair value method for all
awards (735,822) (366,701) (3,096,089) (1,278,088)
------------ ----------- ------------ -----------
Pro forma net loss $ (2,104,628) $(2,459,904) $(10,144,168) $(5,034,418)
============ =========== ============ ===========
Basic earnings (loss) per common share:
As reported $ (0.03) $ (0.08) $ (0.17) $ (0.15)
Pro forma (0.05) (0.09) (0.26) (0.19)
Diluted earnings (loss) per common share:
As reported $ (0.03) $ (0.08) $ (0.17) $ (0.15)
Pro forma (0.05) (0.09) (0.26) (0.19)
7
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
June 30, 2004
(4) Recent Acquisitions
On February 9, 2004, the Company acquired, through its indirect wholly owned
subsidiary, Stonepath Holdings (Hong Kong) Limited, a 55% interest in Shaanxi
Sunshine Cargo Services International Co., Ltd. ("Shaanxi"). Shaanxi is a Class
A licensed freight forwarder headquartered in Shanghai, PRC and provides 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. As consideration for the
purchase, which was effective as of March 1, 2004, the Company paid $5,500,000
consisting of $3,500,000 in cash and $2,000,000 of the Company's common stock;
additionally, in late August 2004 the Company will pay the seller $1,913,000
which represents 55% of Shaanxi's working capital as of March 1, 2004. The
seller may receive additional consideration of up to an additional $5,500,000
under an earn-out arrangement payable at the rate of $1,100,000 per year over a
period of five years based on the future financial performance of Shaanxi. The
Company used funds from its credit facility with LaSalle Business Credit, LLC.
for the cash payment at the closing. The common shares issued in the transaction
are subject to a one year restriction on sale and are subject to a pro rata
forfeiture based upon a formula that compares the actual pre-tax income of
Shaanxi through December 31, 2004 with the targeted level of income of
$4,000,000 (on an annualized basis). Also, if the trading price of the Company's
common stock is less than $3.17 per share at the end of the one-year
restriction, the Company will issue additional shares to the seller. Because the
common shares issued in connection with this transaction are subject to
forfeiture, they are accounted for as additional contingent consideration. When
the number of common shares to be retained by the seller is ultimately
determined, such shares will be valued at their then fair value and will result
in additional goodwill being recorded.
The acquisition, which significantly enhances the Company's presence in the
region, was accounted for as a purchase and accordingly, the results of
operations and cash flows of Shaanxi have been included in the Company's
consolidated financial statements prospectively from the date of acquisition.
Because the Company consolidates its foreign subsidiaries on a one-month lag,
such information has been reflected in the consolidated statement of operations
effective for periods subsequent to April 1, 2004. The total purchase price,
including acquisition expenses of $269,000, but excluding the contingent
consideration, was $5,682,000. The following table summarizes the allocation of
the purchase price based on fair value of the assets acquired and liabilities
assumed at March 1, 2004 (in thousands):
Current assets $ 13,330
Furniture and equipment 157
Goodwill and other intangible assets 3,614
-------------
Total assets acquired 17,101
Current liabilities assumed (9,727)
Minority interest (1,692)
-------------
Net assets acquired $ 5,682
=============
8
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
June 30, 2004
The following unaudited pro forma information is presented as if the acquisition
of Shaanxi had occurred on December 1, 2002, using the one-month lag
consolidation policy (in thousands, except earnings per share):
Three Months Ending June 30, Six Months Ending June 30,
------------------------------------ ------------------------------------
Restated Restated Restated Restated
2004 2003 2004 2003
------------------- ---------------- ----------------- ------------------
Revenue $ 86,470 $ 63,219 $ 171,250 $ 118,217
Income from continuing operations (1,351) (1,520) (6,331) (2,712)
Net income (1,351) (1,875) (6,331) (3,067)
Earnings per share:
Basic $ (0.03) $ (0.06) $ (0.16) $ (0.11)
Diluted (0.03) (0.06) (0.16) (0.11)
(5) Revolving Credit Facility
The Company maintains a $20,000,000 revolving credit facility (the "Facility")
collateralized by the accounts receivable and the other assets of the Company
and its subsidiaries. The Facility requires the Company and its subsidiaries to
meet certain financial objectives and maintain certain financial covenants.
Advances under the Facility may be used to finance future acquisitions, capital
expenditures or for other corporate purposes. The Company expects that the cash
flow from operations of its subsidiaries will be sufficient to support the
corporate overhead of the Company and some portion, if not all, of the
contingent earn-out payments and other cash requirements associated with its
acquisitions. Therefore, the Company anticipates that its primary use of the
Facility will be to finance the cost of new acquisitions and to pay any portion
of existing earn-out arrangements that cash flow from operations is otherwise
unable to fund. At June 30, 2004 the Company had advances of $12,225,000. Based
upon available collateral and net of advances under the Facility and outstanding
letter of credit commitments, there was approximately $6,060,000 available for
borrowing under the Facility. In July 2004, the maximum availability under the
Facility was increased to $25,000,000.
On July 28, 2004, the Company amended its Facility to provide a bridge loan with
a principal amount of $5,000,000, a term of 120 days and interest at 200 basis
points above the price rate. The amendment modified certain financial covenants,
including but not limited to, cash flow coverage ratio test, funded debt
limitations and domestic and worldwide funded debt to consolidated EBITDA. The
Company borrowed the full $5,000,000 available for the bridge loan on August 24,
2004 and subsequently repaid the bridge loan facility on November 26, 2004.
As discussed in Note 2, the Company has restated its consolidated financial
statements. These restated amounts resulted in the technical default of certain
financial covenants of the Facility. 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
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 $125,000 among other
changes to the Facility.
9
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
June 30, 2004
(6) Commitments and Contingencies
On May 6, 2003, the Company elected to settle litigation instituted on August
20, 2000 by Austost Anstalt Schaan, Balmore Funds, S.A. and Amro International,
S.A. Although the Company believed that the plaintiffs' claims were without
merit, the Company chose to settle the matter in order to avoid future
litigation costs and to mitigate the diversion of management's attention from
operations. The total settlement costs of $750,000, paid $400,000 in cash and
$350,000 in shares of the Company's common stock, are included in the
accompanying unaudited consolidated statement of operations for the six month
period ended June 30, 2003.
The Company was 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 were officers Dennis L. Pelino and Thomas L. Scully
and former officer Bohn 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 initially sought 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 were 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
sought compensatory damages, attorneys' fees and costs, and further relief as
may be determined by the Court. The Court has consolidated the eight lawsuits
into a single action and the lead plaintiff has filed an amended complaint. The
amended complaint seeks to represent a class of purchasers of the Company's
shares between March 29, 2002 and September 20, 2004 based upon public
statements made during that period. 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 and 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 January 1, 2001 to the present, 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, the recovery of
bonuses and incentive-based or equity-based compensation received by Mr. Pelino
and Mr. Crain from 2001 through 2004, restitution, 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 is voluntarily cooperating with the staff.
On May 6, 2003, the Company elected to settle litigation instituted on
August 20, 2000 by Austost Anstalt Schaan, Balmore Funds, S.A. and Amro
International, S.A. Although the Company believed that the plaintiffs' claims
were without merit, the Company chose to settle the matter in order to avoid
future litigation costs and to mitigate the diversion of management's attention
from operations. The total settlement costs of $750,000, paid $400,000 in cash
and $350,000 in shares of the Company's common stock, are included in the
accompanying unaudited and restated consolidated statement of operations for the
six-month period ended June 30, 2003.
10
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
June 30, 2004
The Company settled the suit brought by Emergent Capital Investment LLC
in the United States District Court for the Southern District of New York in
exchange for the payment by the Company of $50,000 in November 2004.
On October 22, 2004, Douglas Burke filed a two-count action against
United American Acquisitions, Inc. ("UAF"), Stonepath Logistics Domestic
Services, Inc., and the Company in the Circuit Court for Wayne County, Michigan.
Mr. Burke is the former President and Chief Executive Officer of UAF. The
Company purchased the stock of UAF from Mr. Burke on May 30, 2002 pursuant to a
Stock Purchase Agreement. At the closing of the transaction Mr. Burke received
$5.1 million and received the right to receive an additional $11.0 million in
four annual installments based upon UAF's performance in accordance with the
Stock Purchase Agreement. Subject to the purchase, Stonepath Logistics Domestic
Services, Inc. and Mr. Burke entered into an Employment Agreement. Mr. Burke's
complaint alleges that the defendants breached the terms of the Employment
Agreement and Stock Purchase Agreement and seeks, among other things, the
production of financial information, unspecified damages, attorney's fees and
interest. The defendants believe that Mr. Burke's claims are without merit and
intend to vigorously defend against them.
Victoria Tkach, a former employee of UAF and Stonepath Logistics
Domestic Services, Inc. has filed a complaint against Stonepath Logistics
Domestic Services, Inc., the Company, and UAF seeking damages in excess of
$75,000 and relief from her covenant not to compete. The complaint alleges
sexual harassment and retaliation by the defendants. The defendants believe that
Ms. Tkach's claims are without merit and intend to vigorously defend against
them.
The Company may become involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse effect on
the Company's consolidated financial position, results of operations or
liquidity.
(7) Stockholders' Equity
Common Stock
On March 6, 2003, the Company completed a private placement of 4,470,000 shares
of its common stock. The transaction consisted of the sale of 4,270,000 shares
at $1.35 per share and 200,000 shares at $1.54 per share. In connection with
this transaction, the Company realized gross proceeds of $6,072,500, paid a
brokerage fee consisting of cash commissions of $364,350, issued placement agent
warrants to purchase 297,000 shares of common stock at an exercise price of
$1.49 per share, and incurred other cash expenses of $33,677. In addition, the
Company had previously paid the placement agent $25,000 in cash and had issued
it warrants to purchase 150,000 shares of common stock at an exercise price of
$1.23 per share.
In connection with the Shaanxi acquisition, the Company issued 630,915 shares of
its common stock. Because these shares are subject to a pro rata forfeiture
based on the financial performance of Shaanxi through December 31, 2004, such
shares have not been reflected as outstanding securities in the accompanying
consolidated financial statements.
Series D Convertible Preferred Stock
There are 161,184 shares of Series D Preferred Stock outstanding as of June 30,
2004.
Each share of the Series D Convertible Preferred Stock is convertible into ten
shares of common stock of the Company. 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. The
Series D Convertible Preferred Stock automatically converts into shares of the
Company's common stock as of December 31, 2004.
11
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
June 30, 2004
During the six months ended June 30, 2004, 149,293 shares of the Company's
Series D preferred stock were converted into 1,492,930 shares of the Company's
common stock.
Stock Options and Warrants
The following summarizes the Company's stock option activity and related
information:
Weighted
Range of average
Shares exercise prices exercise price
------------- --------------------- -------------------
Outstanding at January 1, 2004 10,604,134 $ 0.50 - 17.50 $ 1.36
Granted 2,624,700 1.97 - 3.75 2.86
Exercised (1,569,094) 0.60 - 1.81 0.94
Cancelled (253,723) 1.30 - 2.38 1.94
-----------
Outstanding at June 30, 2004 11,406,017 $ 0.50 - 17.50 $ 1.75
==========
The Company received and cancelled 170,579 shares of its common stock in
connection with a cashless exercise on June 22, 2004.
The following summarizes the Company's stock warrant activity and related
information:
Weighted
Range of average
Shares Exercise prices exercise price
---------- --------------------- -------------------
Outstanding at January 1, 2004 1,883,396 $ 1.00 - 1.49 $ 1.03
Granted 600,000 5.00 5.00
Exercised (525,612) 1.00 1.00
---------
Outstanding at June 30, 2004 1,957,784 $ 1.00 - 5.00 $ 2.26
=========
(8) Earnings (Loss) per Share
Basic earnings (loss) per common share has been computed using the
weighted-average number of shares of common stock outstanding during the period.
Diluted earnings (loss) per common share incorporates the incremental shares
issuable upon the assumed exercise of stock options and warrants and upon the
assumed conversion of the Company's preferred stock, if dilutive. Certain stock
options, stock warrants, and convertible securities were excluded from the
calculation of diluted earnings (loss) per share because their effect was
antidilutive. The total numbers of such shares excluded from the diluted
earnings (loss) per common share calculations are 8,326,366 and 9,961,038 for
the three months ended June 30, 2004 and 2003, respectively, and 9,798,859 and
9,474,695 for the six months ended June 30, 2004 and 2003, respectively. Also,
the 630,915 shares of common stock issued in connection with the Shaanxi
acquisition are subject to pro rata forfeiture based upon the financial
performance of Shaanxi through December 31, 2004. Accordingly, such shares have
been excluded from the calculation of basic and diluted earnings (loss) per
common share for the three- and six-month periods ended June 30, 2004.
12
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
June 30, 2004
(9) Income Taxes
The components of income tax expense consist of the following:
Three months ended June 30, Six months ended June 30,
----------------------------------- ------------------------------
Restated Restated Restated Restated
2004 2003 2004 2003
------------- --------------- --------------- ------------
U.S. federal $ 105,100 $ 112,200 $ 210,200 $ 224,400
State 53,900 29,000 80,800 58,000
Foreign 285,371 14,461 352,471 22,282
----------- ---------- ----------- -----------
$ 444,371 $ 155,661 $ 643,471 $ 304,682
=========== ========== =========== ===========
As a result of historical losses related to investments in early-stage
technology businesses which are unrelated to the Company's current activities
and the Company's rapid expansion, the Company has accumulated net operating
losses (NOLs). Due to the uncertainty surrounding the realization of the NOLs,
the Company has placed a valuation allowance on its deferred tax assets. Income
tax expense for the three-month periods ended March 31, 2004 and 2003 resulted
primarily from non-U.S.-based earnings, state income taxes and deferred income
taxes arising from the amortization of goodwill for income tax purposes.
(10) Segment Information
Operating segments are defined as components of an enterprise engaging in
business activities about which separate financial information is available that
is evaluated regularly by the chief operating decision maker or group in
deciding how to allocate resources and in assessing performance. The Company
identifies operating segments based on the principal service provided by the
business unit. Each segment has a separate management structure. The accounting
policies of the reportable segments are the same as described in our Annual
Report on Form 10-K for the year ended December 31, 2003. Segment information,
in which corporate expenses (other than the litigation settlement in 2003) have
been fully allocated to the operating segments, is as follows (in thousands):
13
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
June 30, 2004
Three months ended June 30, 2004
-----------------------------------------------------------
Restated
Domestic International Restated
Services Services Corporate Total
---------- --------- ----------- ----------
Revenue from external customers $ 33,167 53,303 $ - $ 86,470
Intersegment revenue 8 83 - 91
Income (loss) from operations (2,220) 1,857 - (363)
Three months ended June 30, 2003
-----------------------------------------------------------
Restated
Domestic International Restated
Services Services Corporate Total
---------- --------- ----------- ----------
Revenue from external customers $ 24,061 $ 22,273 $ - $ 46,334
Intersegment revenue 6 29 - 35
Income (loss) from operations (2,330) 639 - (1,691)
Six months ended June 30, 2004
-----------------------------------------------------------
Restated
Domestic International Restated
Services Services Corporate Total
---------- --------- ----------- ----------
Revenue from external customers $ 67,863 $ 78,831 $ - $ 146,694
Intersegment revenue 9 95 - 104
Income (loss) from operations (4,783) 2,115 - (2,668)
Segment assets 41,355 65,959 8,592 115,906
Segment goodwill and intangibles, net 23,756 19,038 - 42,794
14
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
June 30, 2004
Six months ended June 30, 2003
--------------------------------------------------------------
Restated
Domestic International Restated
Services Services Corporate Total
--------------- ------------- ------------- ------------
Revenue from external customers $ 47,835 $ 37,071 $ - $ 84,906
Intersegment revenue 40 57 - 97
Income (loss) from operations (2,314) 1,106 (750) (1,958)
Segment assets 46,058 15,778 3,653 65,489
Segment goodwill and intangibles, net 23,129 5,463 - 28,592
The revenue in the table below is allocated to geographic areas based upon the
location of the customer (in thousands):
Three months ended June 30, Six months ended June 30,
------------------------------- -------------------------------
Restated Restated
2004 2003 2004 2003
-------------- ---------------- --------------- ---------------
Total revenue:
United States $ 55,060 $ 45,780 $ 107,996 $ 83,903
Asia 23,875 554 29,946 1,003
North America
(excluding the United States) 814 - 938 -
South America 1,890 - 1,890 -
Europe 3,181 - 3,849 -
Other 1,650 - 2,075 -
---------- --------- --------- ----------
$ 86,470 $ 46,334 $ 146,694 $ 84,906
========== ========= ========= ==========
The following table presents long-lived assets by geographic area
(in thousands):
June 30,
------------------------------------
2004 2003
------------- ------------
United States $ 9,132 $ 6,739
Asia 574 15
South America 121 -
--------- --------
Total long-lived assets $ 9,827 $ 6,754
========= ========
(11) Subsequent Event
Effective November 17, 2004, we amended our revolving credit facility (the
"Amended Facility") with LaSalle Business Credit, LLC in connection with
securing waivers to the technical default resulting from our restated financial
results. See Note 5 for a summary of changes in the Amended Facility.
15
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
March 31, 2004
Effective October 27, 2004, Stonepath Holdings (Hong Kong) Limited ("Asia
Holdings") entered into a $10,000,000 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
guarantee from Stonepath Group, Inc. The Asia Facility carries a term of one
year and an interest rate of 15% for amounts outstanding thereunder. On November
4, 2004, Asia Holdings borrowed $3,000,000 under the Asia Facility.
On November 5, 2004, Asia Holdings distributed $1,045,000 in satisfaction of
amounts due in connection with the working capital acquired in the Shaanxi
transaction and repaid $1,500,000 of intercompany loans to Stonepath Group, Inc.
which was applied to the $5,000,000 bridge loan facility.
On November 26, 2004, the remaining amount outstanding under the bridge term
loan was repaid.
On December 8, 2004, the Company received acceptance of its plan to regain
compliance with the American Stock Exchange ("Amex") continued listing standards
so long as such compliance was achieved by January 6, 2005. Amex has continued
the Company's listing pursuant to the extension. Amex had previously notified
the Company that it was not in compliance with the requirements of Section 134
and 1101 of the Amex Company Guide as a result of its failure to timely file its
Form 10-Q for the period ended September 30, 2004. After consulting with its
outside auditors and counsel, the Company chose not to file Form 10-Q when due
until the Company had finalized its restatement process. This approach was
abandoned when it became evident that KPMG LLP could not complete its audit
within the time stipulated in the accepted plan to regain compliance. On January
6, 2005, the Company notified the Amex that completion of the audit by KPMG LLP
had been delayed, but that it expected KPMG LLP to finalize its audit within the
next few weeks. On January 28, 2005, the Company received notice from Amex that
it had accepted the Company's updated plan of compliance dated January 6, 2005
and that it would continue the Company's listing pursuant to an extension
until February 28, 2005. KPMG has completed its audit, and the Company filed its
Form 10-K/A for the year ended December 31, 2003 on February 11, 2005. On
February 25, 2005, the Company filed its Form 10-Q/A for the period ended
September 30, 2004. On February 28, 2005, Amex notified the Company that it had
regained compliance with the continued listing standards of Amex.
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cautionary Statement For Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, regarding future
results, levels of activity, events, trends or plans. We have based these
forward-looking statements on our current expectations and projections about
such future results, levels of activity, events, trends or plans. These
forward-looking statements are not guarantees and are subject to known and
unknown risks, uncertainties and assumptions about us that may cause our actual
results, levels of activity, events, trends or plans to be materially different
from any future results, levels of activity, events, trends or plans expressed
or implied by such forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"could," "would," "expect," "plan," "anticipate," "believe," "estimate,"
"continue," or the negative of such terms or other similar expressions. While it
is impossible to identify all of the factors that may cause our actual results,
levels of activity, events, trends or plans to differ materially from those set
forth in such forward-looking statements, such factors include the inherent
risks associated with: (i) our ability to sustain an annual growth rate in
revenues consistent with recent results, (ii) our ability to achieve our
targeted operating margins, (iii) our ability to identify, acquire, integrate
and manage additional businesses in a manner which does not dilute our earnings
per share, (iv) our ability to obtain the capital necessary to make additional
acquisitions, (v) the uncertainty of future trading prices of our common stock
and the impact such trading prices may have upon our ability to utilize our
common stock to facilitate our capital raising efforts and associated
acquisition strategy, (vi) the uncertain effect on the future trading price of
our common stock associated with the possible additional issuance of securities
upon the conversion or exercise of outstanding convertible securities and to
satisfy existing contractual commitments, (vii) our dependence on certain large
customers, (viii) our dependence upon certain key personnel, (ix) an unexpected
adverse result in any legal proceeding, (x) the scarcity and competition for the
operating companies we need to acquire to implement our business strategy, (xi)
competition in the freight forwarding, logistics and supply chain management
industry, (xii) the impact of current and future laws affecting the Company's
operations, (xiii) adverse changes in general economic conditions as well as
economic conditions affecting the specific industries and customers we serve,
(xiv) regional disruptions in transportation, (xv) the risk that the actual
results of recently acquired businesses are not consistent with their historical
results and forward-looking guidance provided to us at the time of acquisition,
and (xvi) other factors which are or may be identified from time to time in our
Securities and Exchange Commission filings and other public announcements,
including our most recent Annual Report on Form 10-K for the year ended December
31, 2003. Readers are cautioned not to place undue reliance on forward-looking
statements, which speak only as of the date made. We undertake no obligation to
publicly release the result of any revision of these forward-looking statements
to reflect events or circumstances after the date they are made or to reflect
the occurrence of unanticipated events.
17
Our principal source of income is derived from freight forwarding
services. As a freight forwarder, we arrange for the shipment of our customers'
freight from point of origin to point of destination. Generally, we quote our
customers a turn key cost for the movement of their freight. Our price quote
will often depend upon the customer's time-definite needs (first day through
fifth day delivery), special handling needs (heavy equipment, delicate items,
environmentally sensitive goods, electronic components, etc.) and the means of
transport (truck, air, ocean or rail). In turn, we assume the responsibility for
arranging and paying for the underlying means of transportation.
We also provide a range of other services including customs brokerage,
warehousing and other services, which include customized distribution,
fulfillment, and other value added supply chain services.
Total revenue represents the total dollar value of services we sell to
our customers. Our cost of transportation includes direct costs of
transportation, including motor carrier, air, ocean and rail services. We act
principally as the service provider to add value in the execution and
procurement of these services to our customers. Our net transportation revenue
(gross transportation revenue less the direct cost of transportation) is the
primary indicator of our ability to source, add value and resell services
provided by third parties, and is considered by management to be a key
performance measure. We believe that net revenue is also an important measure of
economic performance. Net revenue includes transportation revenue and our
fee-based activities, after giving effect to the cost of transportation. In
addition, management believes measuring its operating costs as a function of net
revenue provides a useful metric, as our ability to control costs as a function
of net revenue directly impacts operating earnings. With respect to our services
other than freight transportation, net revenue is identical to gross revenue.
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
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:
- the political and economic systems in certain international
markets are less stable than in the United States;
- wars, civil unrest, acts of terrorism and other conflicts
exist in certain international markets;
- export restrictions, tariffs, licenses and other trade
barriers can adversely affect the international trade serviced by
our international operations;
- managing distant operations with different local market
conditions and practices is more difficult than managing domestic
operations;
- differing technology standards in other countries present
difficulties and expense in integrating our services across
international markets;
- complex foreign laws and treaties can adversely affect our ability
to compete; and
- our ability to repatriate funds may be limited by foreign
exchange controls.
18
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. 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 through
November 30. As a result of the one-month lag, the earnings impact of the
Shaanxi transaction was first reflected in our consolidated results beginning in
April 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 for our
business. Accordingly, we employ EBITDA as a measure of our historical financial
performance and as a benchmark for future guidance.
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
Our accounting policies, which are in compliance with accounting
principles generally accepted in the United States, require us to apply
methodologies, estimates and judgments that have a significant impact on the
results we report in our financial statements. In our Annual Report on Form
10-K/A for the year ended December 31, 2003 we have discussed those policies
that we believe are critical and require the use of complex judgment in their
application. Since the date of that Form 10-K/A, there have been no material
changes to our critical accounting policies or the methodologies or assumptions
applied under them.
19
RESULTS OF OPERATIONS
Quarter ended June 30, 2004 compared to quarter ended June 30, 2003
The following table summarizes our total revenue, net transportation
and other revenue (in thousands):
Quarter ended June 30, Change
--------------------------- --------------------------
Restated Restated
2004 2003 Amount Percent
---------- ------------ ----------- -----------
Total revenue $86,470 $ 46,334 $ 40,136 86.6%
======== ======== ========
Transportation revenue 80,589 42,582 38,007 89.3
Cost of transportation 67,405 34,393 33,012 96.0
-------- -------- --------
Net transportation revenue 13,184 8,189 4,995 61.0
Net transportation margin 16.4% 19.2%
Customs brokerage 2,422 2,178 244 11.2
Warehousing and other
value added services 3,459 1,574 1,885 119.8
-------- -------- --------
Total net revenue $19,065 $ 11,941 $ 7,124 59.7%
======== ======== ========
Net revenue margin 22.0% 25.8%
======== ========
Total revenue was $86.4 million in the second quarter of 2004, an
increase of 86.6% over total revenue of $46.3 million in the second quarter of
2003. $7.2 million or 18.1% of the increase in total revenue was attributable to
same store growth with $32.9 million or 81.9% of the increase in total revenue
attributable to acquisitions. The Domestic Services platform delivered $33.0
million in total revenue for the second quarter of 2004, an improvement of $4.8
million and 17.2% over the same prior year period with $2.4 million of the
increase coming from same store growth and the remaining $2.4 million in revenue
growth coming from acquisitions. The International Services platform delivered
$53.4 million in total revenue for the second quarter of 2004, a period over
period improvement of $35.3 million or 195.0%, with $4.8 million of the increase
coming from same store growth and the remaining $30.5 million improvement
attributed to acquisitions.
Net transportation revenue was $13.1 million in the second quarter of
2004, an increase of 61.0% over net transportation revenue of $8.1 million in
the second quarter of 2003. $0.7 million, or 14.3% of the increase in net
transportation revenue, was attributable to same store growth with $4.3 million,
or 85.7% of the increase, attributable to acquisitions. The Domestic Services
platform delivered $6.5 million in net transportation revenue for the second
quarter of 2004, an increase of $0.6 million or 9.3% from the same prior year
period driven by acquisitions. The International Services platform delivered
$6.6 million in net transportation revenue for the second quarter of 2004, a
period over period improvement of $4.4 million or 201.6%, with $0.8 million of
the increase coming from same store growth and the remaining $3.6 million
improvement attributed to acquisitions.
20
Net transportation margin decreased to 16.4% for the second quarter of
2004 from 19.2% for the second quarter of 2003 primarily driven by the change in
revenue mix resulting from the recent acquisitions within the International
Services platform which generally operate at lower margins than those in the
Domestic Services platform. For the second quarter of 2004, net transportation
margin for the Domestic Services platform declined to 21.9% from 22.1% tied
primarily to the low-margin contract that the Company exited late in the second
quarter of 2004 and, to a lesser extent, the impact of new business within the
automotive sector which carries a lower margin. For the International Services
platform, net transportation margin has declined in line with previous
expectations to 13.1% from 14.2% as a result of the general rate increases
imposed by the underlying asset-based carriers as well as the impact of the
recently completed Shaanxi transaction. Shaanxi operates principally as a
wholesaler of airfreight which carries lower margins but provides the
International Services platform with the opportunity for growth in the
higher-margin retail component of the airfreight business.
Customs brokerage and other value added services revenue was $5.9
million in the second quarter of 2004, an increase of 56.7% over $3.8 million in
the second quarter of 2003. $2.0 million or 97.5% of the increase was
attributable to same store growth, with $0.1 million, or 2.5% of the increase
attributable to acquisitions. The Domestic Services platform delivered $3.2
million in other value added services revenue, an improvement of $1.9 million or
156.2% over the same prior year period with $1.8 million of the increase coming
from same store growth driven by the start-up of a significant new key account
and the remaining $0.1 million in growth coming from acquisitions. The
International Services platform delivered $2.7 million in customs brokerage and
other value added services revenue, an increase of $0.2 million or 7.9% over the
same prior year period, all attributable to same store growth.
Net revenue was $19.0 million in the second quarter of 2004, an
increase of 59.7% over net revenue of $11.9 million in the second quarter of
2003. $2.8 million, or 38.6% of the increase in net revenue, was attributable to
same store growth, with $4.3 million, or 61.4% of the increase, attributable to
acquisitions. The Domestic Services platform delivered $9.7 million in net
revenue for the second quarter of 2004, an improvement of $2.5 million or 34.4%
over the same prior year period with $1.7 million of the increase coming from
same store growth with the remaining $0.8 million in growth coming from
acquisitions. The International Services platform delivered $9.3 million in net
revenue for the second quarter of 2004, a period over period improvement of $4.6
million or 98.3%, with $1.0 million of the increase coming from same store
growth and the remaining $3.6 million improvement attributed to acquisitions.
Net revenue margin decreased to 22.0% for the second quarter of 2004
compared to 25.8% for the same prior year period primarily as a result of the
change in revenue mix resulting from the recent acquisitions within the
International Services platform, which generally operate at lower margins than
those in the Domestic Services platform. Net revenue margin at Domestic Services
increased to 29.3% from 25.6% driven by growth in other value added services
provided in connection with the start-up of a significant new key account. For
the International Services platform, net revenue margin declined in line with
previous expectations to 17.5% from 26.1% as a result of the general rate
increases imposed by the underlying asset-based carriers as well as the impact
of the recently completed Shaanxi transaction. Shaanxi operates principally as a
wholesaler of airfreight which carries lower margins but provides the
International Services platform with the opportunity for growth in the
higher-margin retail component of its airfreight business.
21
The following table compares certain consolidated statement of operations
data as a percentage of our net revenue (in thousands):
Quarter ended June 30,
-------------------------------------------------------
Restated Restated
2004 2003 Change
------------------------- -------------------------- -------------------------
Amount Percent Amount Percent Amount Percent
---------- ----------- ----------- ----------- ----------- ----------
Net revenue $19,065 100.0% $11,941 100.0% $ 7,124 59.7%
------- ------- ------- ------ -------
Personnel costs 10,872 57.0 7,003 58.6 3,869 55.2
Other selling, general and
administrative costs 7,423 38.9 6,059 50.7 1,364 22.5
Depreciation and amortization 1,133 6.0 570 4.9 563 98.8
------- ------- ------- ------ -------
Total operating costs 19,428 101.9 13,632 114.2 5,796 42.5
------- ------- ------- ------ -------
Income from operations (363) (1.9) (1,691) (14.2) 1,328 78.5
Interest expense (59) (0.3) (4) - (55) NM
Other income (expense) (20) (0.1) 59 0.5 (79) NM
------- ------- ------- ------ -------
Income from continuing operations
before income tax expense and
minority interest (442) (2.3) (1,636) (13.7) 1,194 73.0
Income tax expense 444 2.3 156 1.3 288 184.6
------- ------- ------- ------ -------
Income from continuing operations
before minority interest (886) (4.6) (1,792) (15.0) 906 50.6
Minority interest 482 2.6 - - 482 NM
------- ------- ------- ------ -------
Income from continuing operations (1,368) (7.2) (1,792) (15.0) 424 23.7
Loss from discontinued operations - - (355) (3.0) 355 100.0
------- ------- ------- ------ -------
Net income $(1,368) 7.2% $(2,147) (18.0)% $ 779 36.3%
======= ======= ======= ====== =======
22
Personnel costs were $10.9 million for the second quarter of 2004, an
increase of 55.2% over $7.0 million for the second quarter of 2003. $1.8 million
or 46.9% of the increase in personnel costs is attributable to incremental costs
assumed as part of our acquisition program with $2.1 million or 53.1% of the
increase attributable to increased costs in the base business. Personnel costs
as a percentage of net revenue decreased to 57.0% in the second quarter of 2004
from 58.6% in the second quarter of 2003. This increase was driven by increased
net revenue relative to the hiring of operations, sales and management
personnel, particularly in the International Services platform as well as
additional resources deployed in support of a key new account in the Domestic
Services platform. Compared to June 30, 2003, headcount increased by 585 to a
total of 1,176 with 430 added in operations, 44 added in sales and marketing and
111 added in financial and administrative services.
Other selling, general and administrative costs were $7.4 million for
the second quarter of 2004, an increase of 22.5% over $6.1 million for the
second quarter of 2003. $1.2 million or 88.0% of the increase is attributable to
incremental costs assumed as part of our acquisition program with $0.1 million
or 12.0% of the increase attributable to increased costs of the base business.
As a percentage of net revenue, other selling, general and administrative costs
decreased to 38.9% in the second quarter of 2004 from 50.7% in the second
quarter of 2003. This decrease is primarily due to our Asian expansion where
operational costs as a percentage of net revenue are much less than in our U.S.
operations.
Depreciation and amortization was $1.1 million in the second quarter of
2004, an increase of 98.8% over $0.6 million in the second quarter of 2003. This
increase is primarily due to the amortization of acquired intangible assets.
Depreciation and amortization as a percentage of net revenue increased to 6.0%
compared to 4.9% in the second quarter of 2003 due to increased amortization of
acquired intangible assets.
Loss from operations was $0.4 million in the second quarter of 2004, as
compared to a loss of $1.7 million for the second quarter of 2003, an
improvement of 78.5%. Loss from operations as a percentage of net revenue was
1.9% for the second quarter of 2004 compared to 14.2% for the second quarter of
2003.
As a result of historical losses related to investments in early-stage
technology businesses, which are unrelated to the Company's current activities
and the Company's rapid expansion, the Company has accumulated federal net
operating losses (NOLs). A portion of tax expense during the three months ended
June 30, 2004 resulted from increased earnings from overseas operations. Thus,
the foreign income tax provision amounted to 64% of the consolidated income tax
provisions and the balance is due to state income taxes and deferred income
taxes resulting from the amortization of goodwill for income tax purposes. At
December 31, 2003, the Company had a net operating loss for federal income taxes
of approximately $24.9 million.
Net loss was $1.4 million in the second quarter of 2004, compared to
$2.1 million in the second quarter of 2003. Basic and diluted loss per common
share were $0.03 for the second quarter of 2004 compared to $0.08 per basic and
diluted common share for the second quarter of 2003.
23
Six months ended June 30, 2004 compared to six months ended June 30,
2003
The following table summarizes our total revenue, net transportation
and other revenue (in thousands):
Six months ended June 30, Change
--------------------------- --------------------------
2004 2003 Amount Percent
------------ ------------ ------------ ----------
Total revenue $146,694 $ 84,906 $ 61,788 72.8%
======== ========= ========
Transportation revenue 135,634 78,362 57,272 73.1
Cost of transportation 110,878 61,027 49,851 81.7
-------- --------- --------
Net transportation revenue 24,756 17,335 7,421 42.8
Net transportation margin 18.3% 22.1%
Customs brokerage 5,101 4,042 1,059 26.2
Warehousing and other
value added services 5,959 2,502 3,457 138.2
-------- --------- --------
Total net revenue $ 35,816 $ 23,879 $ 11,937 50.0%
======== ========= ========
Net revenue margin 24.4% 28.1%
======== =========
Total revenue was $146.7 million in the first six months of 2004, an
increase of 72.8% over total revenue of $84.9 million in the first six months of
2003. $20.6 million or 33.3% of the increase in total revenue was attributable
to same store growth with $41.2 million or 66.7% of the increase in total
revenue attributable to acquisitions. The Domestic Services platform delivered
$67.8 million in total revenue for the first six months of 2004, an improvement
of $15.8 million and 30.3% over the same prior year period with $10.9 million of
the increase coming from same store growth and the remaining $4.9 million in
revenue growth coming from acquisitions. The International Services platform
delivered $78.9 million in total revenue for the first six months of 2004, a
period over period improvement of $46.0 million or 139.9%, with $9.7 million of
the increase coming from same store growth and the remaining $36.3 million
improvement attributed to acquisitions.
Net transportation revenue was $24.7 million in the first six months of
2004, an increase of 42.8% over net transportation revenue of $17.3 million in
the first six months of 2003. $1.7 million, or 22.5% of the increase in net
transportation revenue, was attributable to same store growth with $5.7 million,
or 77.5% of the increase, attributable to acquisitions. The Domestic Services
platform delivered $14.9 million in net transportation revenue for the first six
months of 2004, an improvement of $1.7 million or 13.3% over the prior year
period with $0.6 million of the increase coming from same store growth and the
remaining $1.1 million in revenue growth coming from acquisitions. The
International Services platform delivered $9.8 million in net transportation
revenue for the first six months of 2004, a period over period improvement of
$5.7 million or 135.8%, with $1.0 million of the increase coming from same store
growth and the remaining $4.7 million improvement attributed to acquisitions.
24
Net transportation margin decreased to 18.3% for the first six months
of 2004 from 22.1% for the first six months of 2003 primarily driven by the
change in revenue mix resulting from the recent acquisitions within the
International Services platform which generally operate at lower margins than
those found in the Domestic Services platform. For the first six months of 2004,
net transportation margin for the Domestic Services platform declined to 23.9%
from 26.3% tied primarily to the low-margin contract that the Company exited
late in the second quarter of 2004 and, to a lesser extent, the impact of new
business within the automotive sector which carries a lower margin. For the
International Services platform, net transportation margin has declined in line
with previous expectations to 13.4% from 14.8% as a result of the general rate
increases imposed by the underlying asset-based carriers as well as the impact
of the recently completed Shaanxi transaction. Shaanxi operates principally as a
wholesaler of airfreight which carries lower margins but provides the platform
with the opportunity for growth in the higher-margin retail component of its
airfreight business.
Customs brokerage and other value added services revenue was $11.0
million in the first six months of 2004, an increase of 69.0% over $6.5 million
in the first six months of 2003. $4.2 million or 92.4% of the increase was
attributable to same store growth, with $0.3 million, or 7.6% of the increase
attributable to acquisitions. The Domestic Services platform delivered $5.3
million in other value added services revenue, an improvement of $3.4 million or
170.9% over the same prior year period with $3.1 million of the increase coming
from same store growth driven by the start-up of a significant new key account
and the remaining $0.3 million in growth coming from acquisitions. The
International Services platform delivered $5.7 million in customs brokerage and
other value added revenue, an increase of $1.1 million or 25.2% over the same
prior year period, primarily attributable to same store growth.
Net revenue was $35.8 million in the first six months of 2004, an
increase of 50.0% over net revenue of $23.9 million in the first six months of
2003. $5.8 million or 49.0% of the increase in net revenue was attributable to
same store growth, with $6.1 million, or 51.0% of the increase attributable to
acquisitions. The Domestic Services platform delivered $20.2 million in net
revenue for the first six months of 2004, an improvement of $5.1 million or
33.8% over the same prior year period with $3.8 million of the increase coming
from same store growth with the remaining $1.3 million in growth coming from
acquisitions. The International Services platform delivered $15.6 million in net
revenue for the first six months of 2004, a period over period improvement of
$6.8 million or 78.0%, with $2.1 million of the increase coming from same store
growth and the remaining $4.7 million improvement attributed to acquisitions.
Net revenue margin decreased to 24.4% for the first six months of 2004
compared to 28.1% for the same prior year period primarily driven by the change
in revenue mix resulting from the recent acquisitions within the International
Services platform which generally operate at lower margins than those found in
the Domestic Services platform. Net revenue margin at Domestic Services
increased to 29.9% from 29.1% with a decrease in net transportation margin
offset by growth in other value added services provided in connection with the
start-up of a significant new key account. For the International Services
platform, net revenue margin declined in line with previous expectations to
19.7% from 26.6% as a result of the underlying asset-based carriers as well as
the impact of the recently completed Shaanxi transaction. Shaanxi operates
principally as a wholesaler of airfreight which carries lower margins but
provides the platform with the opportunity for growth in the higher-margin
retail component of the airfreight business. Partially offsetting the decline in
net revenue margin is the significant period over period growth in our customs
brokerage services revenue.
25
The following table compares certain consolidated statement of
operations data as a percentage of our net revenue (in thousands):
Six months ended June 30,
-------------------------------------------------------
Restated Restated
2004 2003 Change
-------------------------- ------------------------- -------------------------
Amount Percent Amount Percent Amount Percent
------------ ----------- ----------- ---------- ---------- -----------
Net revenue $ 35,816 100.0% $23,879 100.0% $11,937 50.0%
-------- -------- ------- ----- --------
Personnel costs 20,769 58.0 13,566 56.8 7,203 53.1
Other selling, general and administrative
costs 15,732 43.9 10,361 43.4 5,371 51.8
Depreciation and amortization 1,984 5.6 1,160 4.9 824 71.0
Litigation settlement - - 750 3.1 (750) (100.0)
-------- -------- ------- ----- --------
Total operating costs 38,485 107.5 25,837 108.2 12,648 49.0
-------- -------- ------- ----- --------
Income (loss) from operations (2,669) (7.5) (1,958) (8.2) (711) (36.3)
Provision for excess
earn-out payments (3,075) (8.6) (1,270) (5.3) (1,805) (142.1)
Interest expense (95) (0.3) (2) - (93) NM
Other income (expense) (35) - 86 0.3 (121) NM
-------- -------- ------- ----- --------
Income (loss) from continuing operations
before income tax expense (benefit)
and minority interest (5,874) (16.4) (3,144) (13.2) (2,730) (86.8)
Income tax expense (benefit) (643) 1.8 305 1.21 338 110.8
-------- -------- ------- ----- --------
Income from continuing operations
before minority interest (6,517) (18.2) (3,449) (14.4) (3,068) (89.0)
Minority interest 552 1.5 - - 552 NM
-------- -------- ------- ----- --------
Income (loss) from continuing operations (7,069) (19.7) (3,449) (14.4) (3,620) (105.0)
Loss from discontinued operations - - (355) (1.5) 355 (100.0)
-------- -------- ------- ----- --------
Net income (loss) $ (7,069) (19.7)% $(3,804) (15.9)% $ (3,265) (85.8)%
======== ======== ======= ===== ========
Personnel costs were $20.8 million for the first six months of 2004, an
increase of 53.1% over $13.6 million for the first six months of 2003. $2.7
million or 38.1% of the increase in personnel costs is attributable to
incremental costs assumed as part of our acquisition program with $4.5 million
or 61.9% of the increase attributable to increased costs in the base business.
Personnel costs as a percentage of net revenue increased to 58.0% in the first
six months of 2004 from 56.8% in the first six months of 2003. This increase was
driven by the hiring of operations, sales and management personnel, particularly
in the International Services platform as well as additional resources deployed
in support of a significant new key account in the Domestic Services platform.
Compared to June 30, 2003, headcount increased by 585 to a total of 1,176 with
430 added in operations, 44 added in sales and marketing and 111 added in
financial and administrative services.
26
Other selling, general and administrative costs were $15.7 million for
the first six months of 2004, an increase of 51.8% over $10.3 million for the
first six months of 2003. $1.9 million or 35.2% of the increase is attributable
to incremental costs assumed as part of our acquisition program with $3.5
million or 64.8% of the increase attributable to increased costs of the base
business. As a percentage of net revenue, other selling, general and
administrative costs increased to 43.9% in the first six months of 2004 from
43.4% in the first six months of 2003. This increase is primarily due to
non-recurring charges incurred in the first quarter of 2004 related to bad
debts, communication and technology costs and higher than expected costs related
to our Sarbanes-Oxley compliance initiatives.
Depreciation and amortization was $2.0 million in the first six months
of 2004, an increase of 71.0% over $1.2 million in the first six months of 2003.
This increase is primarily due to the amortization of acquired intangible
assets. Depreciation and amortization as a percentage of net revenue increased
to 5.6% compared to 4.9% in the first six months of 2003 due to increased
amortization of acquired intangible assets.
In the first quarter of 2003, litigation settlement charges resulted
from the settlement of litigation that arose prior to our transition to a
logistics business. Such settlement was ultimately paid using $400,000 in cash
and $350,000 in shares of the Company's common stock.
Loss from operations was $2.7 million in the first six months of 2004,
as compared to $2.0 million for the first six months of 2003. Loss from
operations as a percentage of net revenue was 7.5% for the first six months of
2004 compared to 8.2% for the first six months of 2003.
Provision for excess earn-out payments represents a valuation
adjustment for amounts paid to former shareholders of acquired companies 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 upon the
restated financial results for 2003. Due to differing interpretations by the
Company and the selling shareholders of the earn-out provisions of the purchase
agreements, the Company has determined that the resulting receivable from the
former shareholders should be fully reserved for. If in the future, excess
amounts paid are recovered, those proceeds would be reflected as other income on
the Company's statement of operations.
As a result of historical losses related to investments in early-stage
technology businesses, which are unrelated to the Company's current activities
and the Company's rapid expansion, the Company has accumulated federal net
operating losses (NOLs). A portion of tax expense during the six months ended
June 30, 2004 resulted from increased earnings from overseas operations. The
foreign income tax provision amounted to 55% of the consolidated income tax
provisions and the balance is due to state income taxes and deferred income
taxes resulting from the amortization of goodwill for income tax purposes. At
December 31, 2003, the Company had a net operating loss for federal income taxes
of approximately $24.9 million.
Net loss was $7.1 million in the first six months of 2004, compared to
$3.8 million in the first six months of 2003. Basic and diluted loss per common
share was $0.17 for the first six months of 2004 compared to $0.15 per basic and
diluted common share for the first six months of 2003.
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, systems and personnel within the U.S. Some of these initiatives have
been undertaken 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 and the first quarter of 2005.
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. 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.
27
SOURCES OF GROWTH
Management believes that a comparison of "same store" revenue 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" revenue growth comparisons for the six-month period ended June 30,
2004 (which is the measure of any increase from the same period of 2003).
For the six months ended
June 30, 2004
Domestic 21.4%
International 29.8%
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $1.3 million and $3.1 million as of
June 30, 2004 and December 31, 2003, respectively. Working capital totaled $3.0
million and $13.1 million at June 30, 2004 and December 31, 2003, respectively.
Cash used in operating activities was $2.6 million for the first six
months of 2004 compared to $5.0 million used in the first six months of 2003.
This improvement over the comparable prior year period was driven principally by
proactive working capital management and increased amortization charges related
to our acquired intangible assets.
Net cash used in investing activities during the first six months of
2004 was $13.0 million compared to $10.2 million in the first six months of
2003. Investing activities were driven principally by approximately $3.4 million
in earn-out payments made in relation to 2003 performance targets, $6.7 million
paid for acquisitions (net of cash acquired) and $2.8 million spent primarily in
connection with the development of Tech-Logis(TM), the Company's new web-based
technology platform.
Net cash provided by financing activities during the first six months
of 2004 was $13.9 million compared to $13.3 million in the first six months of
2003. Financing activities consisted of $12.2 million in proceeds from the
Company's line of credit and $2.0 million from the issuance of common stock upon
the exercises of options and warrants, offset by principal payments of $0.3
million for capital lease obligations. We may receive proceeds in the future
from the exercise of options and warrants that were outstanding as of the end of
the first six months. As of June 30, 2004, approximately 13,364,000 options and
warrants were outstanding.
Proceeds
Number of shares if exercised
Options outstanding under our Stock Option Plan 10,766,817 $ 17,887,274
Non-Plan Options 639,200 2,086,750
Warrants 1,957,784 4,417,794
---------- -------------
Total 13,363,801 $ 24,391,818
========== =============
Effective November 17, 2004, we amended our revolving credit facility
with LaSalle Business Credit, LLC (the "U.S. Facility"). 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. 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 2.00%. 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 by November 26, 2004.
Under the terms of our amended U.S. Facility, we are not permitted to
make additional acquisitions without the lender's consent. In addition, as a
condition to the distribution of any earn-out payments for any of its U.S.-based
operations, the amended U.S. Facility requires that the Company maintain a 60
day average undrawn availability of at least $2.5 million after taking effect
for any such earn-out distribution.
28
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% 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.
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 transaction was valued at up to $34.5 million,
consisting of cash of $17.5 million paid at closing and a four-year earn-out
arrangement of up to $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 and 2004 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 June 30, 2004 the
excess earn-out payments related to the 2002 and 2003 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.
29
On April 4, 2002, we acquired Stonepath Logistics International
Services, Inc. ("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 SLIS. 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 SLIS achieves pre-tax
income of $2.0 million in each of the years preceding the year of payment (or
the pro rata portion thereof in 2002 and 2007). In the event there is a
shortfall in pre-tax income, the earn-out payment will be reduced on a pro-rata
basis. Shortfalls may be carried over or carried back to the extent that pre-tax
income in any other 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 ("SLIS' tier-two
earn-out"). Under SLIS' 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. SLIS 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, SLIS 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
30
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 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
increased costs of purchased transportation as a result of the restatements and
the Company's interpretation of the underlying purchase agreement language, the
cumulative adjusted earnings for United American from the date of acquisition
through December 31, 2003 is $1.5 million compared to the previously calculated
amount of $2.4 million. The Company believes that is 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 and 2004 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 June 30, 2004, the excess earn-out payments related to the 2002 and
2003 results of operations have been fully reserved for because of differing
interpretations by the Company and the selling shareholders of the earn-out
provisions of the purchase agreement. However, the Company will seek the refund
of such excess payments.
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 has
also agreed to pay the former members of Regroup an additional $2.5 million if
Regroup earns $3.5 million in pre-tax income during the 12-month period
commencing July 1, 2003. In addition, the Company has also provided the former
members of Regroup with an additional incentive to generate earnings in excess
of the base $3.5 million annual earnings target ("Regroup's tier-two earn-out").
Under Regroup's tier-two earn-out, the former members of Regroup are also
entitled to receive 50% of the cumulative pre-tax earnings in excess of $17.5
million generated during the five-year earn-out period subject to a maximum
additional earn-out opportunity of $10.0 million. Regroup would need to generate
cumulative earnings of $37.5 million over the five-year earn-out period in order
for the former members to receive the full $22.5 million in contingent earn-out
payments.
On 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 2007). 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 an earn-out payment of $0.2 million on April 1, 2004.
31
On February 9, 2004, through a wholly-owned subsidiary, we acquired a
55% interest in Shanghai-based Shaanxi Sunshine Cargo Services International
Co., Ltd. ("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 purchase price, on a post-closing basis the Company has
agreed to pay Shaanxi for 55% of its closing date working capital. The common
shares issued in the transaction are subject to a one year restriction on sale
and are subject to a pro rata forfeiture based upon a formula that compares the
actual pre-tax income of Shaanxi through December 31, 2004 with the targeted
level of income of $4.0 million (on an annualized basis). Also, if the trading
price of the Company's common stock is less than $3.17 per share at the end of
the one-year restriction, the Company will issue additional shares to the
seller.
We will be required to make significant payments in the future if the
earn-out installments under our various acquisitions become due. While we
believe that a significant portion of the required payments will be generated by
the acquired subsidiaries, we may have to secure additional sources of capital
to fund some portion of the earn-out payments as they become due. This presents
us with certain business risks relative to the availability and pricing of
future fund raising, as well as the potential dilution to our stockholders if
the fund raising involves the sale of equity.
32
The following table summarizes our contingent base earn-out payments for the
years indicated based on results of the prior year (in thousands)(1)(2):
2005 2006 2007 2008 2009 TOTAL
----------------------------------------------------------------------------------------
Earn-out payments:
Domestic $ 9,040 $ 8,050 $ 2,500 $ 2,500 $ -- $ 22,090
International 4,064 4,224 4,596 2,862 2,330 18,076
---------------------------------------------------------------------------------------
Total earn-out
payments $ 13,104 $ 12,274 $ 7,096 $ 5,362 $ 2,330 $ 40,166
=========== ============ ============ ============ ============ ============
Prior year pre-tax earnings targets (3)
Domestic $ 12,306 $ 12,306 $ 3,500 $ 3,500 $ -- $ 31,612
International 10,746 10,946 12,002 7,340 6,223 47,257
----------------------------------------------------------------------------------------
Total pre-tax
earnings targets $ 23,052 $ 23,252 $ 15,502 $ 10,840 $ 6,223 $ 78,869
============ ============ ============ ============ ============ ============
Earn-outs as a percentage of prior year pre-tax earnings targets:
Domestic 73.5% 65.4% 71.4% 71.4% -- 69.9%
International 37.8% 38.6% 38.3% 39.0% 37.4% 38.3%
Combined 56.8% 52.8% 45.8% 49.5% 37.4% 50.9%
-------------
(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) 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.
One of the Company's customers which is the subject of a Chapter 11
proceeding under the Bankruptcy Code, paid to the Company approximately $1.3
million of pre-petition indebtedness for shipping and delivery charges pursuant
to an order of a United States Bankruptcy Court authorizing the payment of such
charges. One of the creditors in the Chapter 11 proceeding appealed other orders
of the Bankruptcy Court authorizing the payment of pre-petition indebtedness to
other creditors for other charges and those orders have been reversed by a court
proceeding. While no action has been taken in the Bankruptcy Court to challenge
the payment made to the Company, if such action were taken in the future and
that action were successful, the Company could be required to return all or a
substantial portion of the payments made by the customer.
32
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's investment portfolio and its line of credit.
The Company does not have any derivative financial instruments in its investment
portfolio. The Company is averse to principal loss and ensures the safety and
preservation of its invested funds by limiting default risk, market risk and
reinvestment risk. The Company invests its excess cash in institutional money
market accounts. The Company does not use interest rate derivative instruments
to manage its exposure to interest rate changes. If market interest rates were
to change by 10% from the levels at June 30, 2004, the change in interest
expense would have had an immaterial impact on the Company's results of
operations and cash flows.
The Company also has exposure to foreign currency fluctuations with
respect to its offshore subsidiaries. The Company does not utilize derivative
instruments to manage such exposure. A hypothetical change of 10% in the value
of the U.S. dollar would have had an immaterial impact on the Company's results
of operations.
Item 4. Controls and Procedures
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.
34
On September 20, 2004, the Company announced, after having performed
some additional analysis, that it had understated its accrued purchased
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 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, in
and of itself, constitutes 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 and to the processing of loss and
damage claims, all 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. This location also
identified loss and damage claims in the fourth quarter of 2004 that related to
the first quarter of 2004 and accordingly restated for those claims. 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, the accounting error, and the error related
to loss and damage claims 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 errors
related to revenue recognition and loss and damage claims, 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 financial statements for the first two
quarters of 2004 and 2003, and years ended December 31, 2003, 2002 and 2001 to
correct the processing errors related to its purchased transportation accrual,
the customer billings, revenue recognition, loss and damage claim costs 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 restatements.
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 recognition 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
weaknesses described above.
35
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 4 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-Q/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.
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.
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.
36
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company was 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 were 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 initially sought 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 were 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
sought compensatory damages, attorneys' fees and costs, and further relief as
may be determined by the Court. The Court has consolidated the eight lawsuits
into a single action and the lead plaintiff has filed an amended complaint. The
amended complaint seeks to represent a class of purchasers of the Company's
shares between March 29, 2002 and September 20, 2004 based upon public
statements made during that period. 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 January 1, 2001 to the present, 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, the recovery of
bonuses and incentive-based or equity-based compensation received by Mr. Pelino
and Mr. Crain from 2001 through 2004, restitution, 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 relative 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 is voluntarily cooperating with the staff.
37
On October 22, 2004, Douglas Burke filed a two-count action against
United American Acquisitions, Inc. ("UAF"), Stonepath Logistics Domestic
Services, Inc., and the Company in the Circuit Court for Wayne County, Michigan.
Mr. Burke is the former President and Chief Executive Officer of UAF. The
Company purchased the stock of UAF from Mr. Burke on May 30, 2002 pursuant to a
Stock Purchase Agreement. At the closing of the transaction Mr. Burke received
$5.1 million and received the right to receive an additional $11.0 million in
four annual installments based upon UAF's performance in accordance with the
Stock Purchase Agreement. Subject to the purchase, Stonepath Logistics Domestic
Services, Inc. and Mr. Burke entered into an Employment Agreement. Mr. Burke's
complaint alleges that the defendants breached the terms of the Employment
Agreement and Stock Purchase Agreement and seeks, among other things, the
production of financial information, unspecified damages, attorney's fees and
interest. The defendants believe that Mr. Burke's claims are without merit and
intend to vigorously defend against them.
Victoria Tkach, a former employee of UAF and Stonepath Logistics
Domestic Services, Inc. has filed a complaint against Stonepath Logistics
Domestic Services, Inc., the Company, and UAF seeking damages in excess of
$75,000 and relief from her covenant not to compete. The complaint alleges
sexual harassment and retaliation by the defendants. The defendants believe that
Ms. Tkach's claims are without merit and intend to vigorously defend against
them.
The Company is not able to predict the outcome of any of the foregoing
litigation at this time, since each action is in an early stage. An adverse
determination in any of those actions could have a material and adverse effect
on the Company's financial position, results of operations and/or cash flows.
The Company settled the suit brought by Emergent Capital Investment LLC
("Emergent") in the United States District Court for the Southern District of
New York in exchange for the payment by the Company of $50,000 in November 2004.
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 legal proceedings.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
Effective as of June 15, 2004, we issued 42,735 shares of our common
stock to Quantum Logistics, Inc. in partial consideration of certain of its
assets. The shares were valued, for purposes of the acquisition, at $100,000
($2.34 per share), and were issued in a private placement transaction exempt
from the registration requirements of the Securities Act of 1933 pursuant to
Section 4(2) and Rule 506 thereunder as an issuer transaction not involving a
public offering.
38
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
We held our Annual Meeting of Stockholders on May 26, 2004. At the
Annual Meeting our stockholders voted on the following proposals identified in
our Proxy Statement dated April 8, 2004:
(1) Vote for the Election of Directors:
The following directors were elected to serve as members of our Board
of Directors:
For Withheld
Dennis Pelino 28,840,544 0
J. Douglass Coates 28,842,194 0
John Springer 28,765,594 0
David R. Jones 28,838,044 0
Aloysius T. Lawn, IV 28,835,414 0
Robert McCord 28,842,094 0
(2) Proposal to approve amendments to the Stonepath Group, Inc. Amended
and Restated 2000 Stock Incentive Plan to increase the number of shares of the
Company's Common Stock which may be issued thereunder:
For Against Uninstructed Abstain
7,358,473 5,791,314 16,035,771 163,236
(3) Proposal to ratify appointment of KPMG LLP as independent auditors
for the Company:
For Against Abstain
29,015,987 287,119 45,688
Item 5. Other Information
Effective October 27, 2004, a subsidiary of the Company, Stonepath
Holdings (Hong Kong) Limited ("Asia Holdings") entered into a Term
Credit Agreement (the "Term Credit Agreement") with Hong Kong Central
League Credit Union (the "Lender") and SBI Advisors, LLC, as agent for
the Lender. The Term Credit Agreement provides Asia Holdings with the
right to borrow an initial amount of $3.0 million and up to an
additional $7.0 million upon the satisfaction of certain conditions.
The obligations of Asia Holdings under the Term Credit Agreement are
secured by floating charges on the foreign accounts receivable of three
of its subsidiaries, Planet Logistics Express (Singapore) Pte. Ltd.,
GLink Express (Singapore) Pte. Ltd., and Stonepath Logistics (Hong
Kong) Limited. Asia Holdings borrowed $3.0 million on November 4, 2004
and $2.0 million on February 16, 2005. There is no assurance that the
remaining $5.0 million will be available to Asia Holdings under the
Term Credit Agreement. All borrowings under the Term Credit Agreement
bear interest at an annual rate of 15% and must be repaid on or before
November 4, 2005. The obligation to repay the borrowings under the Term
Credit Agreement may be accelerated by the Lender upon the occurrence
of events of default customary for loan transactions. Stonepath Group,
Inc. has guaranteed the obligations of Asia Holdings under the Term
Credit Agreement pursuant to the terms of the Guaranty dated as of
October 27, 2004 (the "Guaranty") by Stonepath Group, Inc. in favor of
the Lender.
On September 20, 2004, the Company announced that its financial
statements for 2003 and the first and second quarters of 2004 needed to
be restated and should not be relied upon. Since September 20, 2004, the
Company has analyzed its costs of purchased transportation, certain
revenue transactions, loss and damage claims and the resulting income
tax and other effects. In addition, as described in the next paragraph,
the amount actually owed for certain earn-out payments was impacted. The
effects of the restatements have been reflected in this Form 10-Q/A.
As a result of the restatement process, the Company has determined that
it made earn-out payments to the former owners of its Air Plus and
United American subsidiaries in excess of amounts due. These amounts
have been reflected in the accompanying financial statements as other
assets. A full valuation allowance has been provided for those advances
due to the differing interpretation of the stock purchase agreements by
the Company and the selling shareholders. The affect of this change
reduced net income by $3.1 million for the six-month period ended June
30, 2004 and $1.3 million for the six-month period ended June 30, 2003.
Goodwill has been reduced by similar amounts from that previously
reported.
39
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
10.16 Fifth Amendment to Loan and Security Agreement dated April 6, 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 Governmental Services, Inc., Stonepath
Logistics International Services, Inc., Stonepath Logistics
International Services, Inc., Stonepath Offshore Holdings, Inc.,
Stonepath Operations, Inc., and United American Acquisitions and
Management, Inc.(1)
10.17 Sixth Amendment to Loan and Security Agreement dated July 28, 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 Governmental Services, Inc., Stonepath
Logistics International Services, Inc., Stonepath Logistics
International Services, Inc., Stonepath Offshore Holdings, Inc.,
Stonepath Operations, Inc., and United American Acquisitions and
Management, Inc.(1)
12 Calculation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends.
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. (This exhibit shall not be deemed "filed"
for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended, or otherwise subject to the liability of that section.
Further, this exhibit shall not be deemed to be incorporated by
reference into any filing under the Securities Act of 1933, as amended,
or the Securities Exchange Act of 1934, as amended.)
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. (This exhibit shall not be deemed "filed"
for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended, or otherwise subject to the liability of that section.
Further, this exhibit shall not be deemed to be incorporated by
reference into any filing under the Securities Act of 1933, as amended,
or the Securities Exchange Act of 1934, as amended.)
---------
(1) Incorporated by reference to the Company's Form 10-Q for the second quarter
ended June 30, 2004, filed on August 9, 2004.
40
(b) Reports on Form 8-K:
On April 23, 2004, the Company filed an amendment to its Form 8-K
dated February 9, 2004, to provide the information required under
Item 7(b) of Form 8-K.
On May 7, 2004, the Company filed a Current Report on Form 8-K
dated May 6, 2004, furnishing under Items 9 and 12 a copy of its
press release announcing the Company's financial results for the
three months ended March 31, 2004.
On June 24, 2004, the Company filed a Current Report on Form 8-K
dated June 17, 2004, reporting under Item 4 on the dismissal of
KPMG LLP as the Company's independent accountants and the
engagement of Grant Thornton LLP as its new independent
accountants.
On June 30, 2004, the Company filed an amendment to its Form 8-K
dated June 17, 2004, to include a letter from KPMG LLP regarding
its dismissal as the Company's independent accountants.
41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STONEPATH GROUP, INC.
Date: March , 2005 /s/ Jason Totah
--------------------------------------
Jason Totah
Chief Executive Officer
Date: March , 2005 /s/ Thomas L. Scully
--------------------------------------
Thomas L. Scully
Chief Financial Officer, Vice President and
Controller
(Principal Financial and Accounting Officer)
42