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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
[_] 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.
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(Exact name of registrant as specified in its charter)
Delaware 65-0867684
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(State or other jurisdiction of (I.R.S. Employer 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
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that 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 |__| No |X|
There were 28,200,739 issued and outstanding shares of the registrant's common
stock, par value $.001 per share, at May 5, 2003.
STONEPATH GROUP, INC.
INDEX
Page
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Part I. FINANCIAL INFORMATION.................................................................................1
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 2003 (Unaudited) and December 31, 2002.................1
Consolidated Statements of Operations (Unaudited)
Three months ended March 31, 2003 and 2002......................................................2
Consolidated Statements of Cash Flows (Unaudited)
Three months ended March 31, 2003 and 2002......................................................3
Notes to Unaudited Consolidated Financial Statements............................................4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........11
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................27
Item 4. Controls and Procedures.........................................................................27
Part II. OTHER INFORMATION....................................................................................28
Item 1. Legal Proceedings...............................................................................28
Item 2. Changes in Securities and Use of Proceeds.......................................................28
Item 3. Defaults Upon Senior Securities.................................................................29
Item 4. Submission of Matters to a Vote of Security Holders.............................................29
Item 5. Other Information...............................................................................29
Item 6. Exhibits and Reports on Form 8-K................................................................29
SIGNATURES..............................................................................................31
CERTIFICATIONS..........................................................................................32
i
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
STONEPATH GROUP, INC.
Consolidated Balance Sheets
March 31, 2003 December 31, 2002
-------------- -----------------
(UNAUDITED)
Assets
Current assets:
Cash and cash equivalents $ 2,669,053 $ 2,266,108
Accounts receivable, net 19,411,377 21,799,983
Loans receivable from related parties 33,344 39,593
Prepaid expenses 1,254,482 963,102
------------- -------------
Total current assets 23,368,256 25,068,786
Goodwill 25,041,150 25,041,150
Furniture and equipment, net 4,748,038 3,233,677
Acquired intangibles, net 1,748,771 1,760,611
Note receivable, related party 262,500 262,500
Other assets 965,135 1,246,847
------------- -------------
$ 56,133,850 $ 56,613,571
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 8,663,265 $ 12,873,703
Earn-out payable 1,060,706 3,879,856
Accrued payroll and related expenses 643,861 1,195,275
Accrued expenses 3,012,072 1,786,100
------------- -------------
Total liabilities 13,379,904 19,734,934
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares authorized;
Series D, convertible, issued and outstanding: 360,745 shares
(liquidation preference: $21,644,700) 361 361
Common stock, $.001 par value, 100,000,000 shares authorized;
issued and outstanding: 27,945,914 and 23,453,414 shares at
2003 and 2002, respectively 27,946 23,453
Additional paid-in capital 201,807,544 196,235,064
Accumulated deficit (158,989,307) (159,263,835)
Deferred compensation (92,598) (116,406)
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Total stockholders' equity 42,753,946 36,878,637
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$ 56,133,850 $ 56,613,571
============= =============
See accompanying notes to unaudited consolidated financial statements.
1
STONEPATH GROUP, INC.
Consolidated Statements of Operations
(UNAUDITED)
Three months ended March 31,
----------------------------
2003 2002
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Total revenue $ 45,365,204 $ 13,065,560
Cost of transportation 33,181,564 8,645,969
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Net revenue 12,183,640 4,419,591
Personnel costs 6,563,080 2,593,076
Other selling, general and administrative costs 4,610,318 2,846,259
Litigation settlement 750,000 --
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Income (loss) from operations 260,242 (1,019,744)
Other income
Interest income 14,767 55,457
Other, net 14,740 --
------------- -------------
Income (loss) before income taxes 289,749 (964,287)
Income taxes 15,221 --
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Net income (loss) 274,528 (964,287)
Preferred stock dividends -- (887,772)
------------- -------------
Net income (loss) attributable to common stockholders $ 274,528 $ (1,852,059)
============= =============
Basic earnings (loss) per common share(1) $ 0.01 $ (0.09)
============= =============
Diluted earnings (loss) per common share(1) $ 0.01 $ (0.09)
============= =============
Basic weighted average common shares outstanding 24,764,810 20,903,110
============= =============
Diluted weighted average common shares outstanding 32,313,842 20,903,110
============= =============
(1) Includes effect of preferred stock dividends in 2002.
See accompanying notes to unaudited consolidated financial statements.
2
STONEPATH GROUP, INC.
Consolidated Statements of Cash Flows
(UNAUDITED)
Three months ended March 31,
----------------------------
2003 2002
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Cash flow from operating activities:
Net income (loss) $ 274,528 $ (964,287)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 307,945 180,680
Stock-based compensation 23,808 47,938
Loss on disposal of furniture and equipment -- 3,362
Changes in assets and liabilities:
Accounts receivable 2,388,606 1,874,300
Other assets 32,107 (140,062)
Accounts payable and accrued expenses (3,697,654) (3,571,777)
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Net cash used in operating activities (670,660) (2,569,846)
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Cash flows from investing activities:
Purchases of furniture and equipment (1,734,218) (111,423)
Acquisition of business (70,000) --
Payment of earn-out (2,819,150) --
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Net cash used in investing activities (4,623,368) (111,423)
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Cash flows from financing activities:
Issuance of common stock, net of costs 5,696,973 --
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Net cash provided by financing activities 5,696,973 --
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Net increase (decrease) in cash and cash equivalents 402,945 (2,681,269)
Cash and cash equivalents at beginning of year 2,266,108 15,227,830
------------ -------------
Cash and cash equivalents at end of period $ 2,669,053 $ 12,546,561
============ =============
See accompanying notes to unaudited consolidated financial statements.
3
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
March 31, 2003
(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, 2002. Interim operating
results are not necessarily indicative of the results for a full year because
our operating results are subject to seasonal trends when measured on a
quarterly basis. Our first and second quarters are likely to be weaker as
compared with our other fiscal quarters, which we believe is consistent with the
operating results of other supply chain service providers.
Certain prior period amounts have been reclassified to conform to the current
presentation.
(2) Stock-Based Compensation
In December 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amended the disclosure
requirements of SFAS No. 123, "Accounting and Disclosure of Stock-Based
Compensation" to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
accounts for its employee stock option grants by applying the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations.
4
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
March 31, 2003
The table below illustrates the effect on net income (loss) attributable to
common stockholders and income (loss) per common share as if the fair value of
options granted had been recognized as compensation expense in accordance with
the provisions of SFAS No. 123.
Three months ended March 31,
------------------------------------
2003 2002
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Net income (loss) attributable to common stockholders:
As reported $ 274,528 $ (1,852,059)
Add: stock-based employee compensation expense
included in reported net income (loss) 22,618 47,938
Deduct: total stock-based compensation expense determined under
fair value method for all awards (894,318) (423,100)
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Pro forma net income (loss) attributable to common stockholders $ (597,172) $ (2,227,221)
============ =============
Basic earnings (loss) per common share:
As reported $ 0.01 $ (0.09)
Pro forma (0.02) (0.11)
Diluted earnings (loss) per common share:
As reported $ 0.01 $ (0.09)
Pro forma (0.02) (0.11)
(3) Revolving Credit Facility
To ensure adequate financial flexibility, in May 2002 we secured a $15.0 million
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. We expect that the cash flow from operations of our
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 our acquisitions. Therefore, we anticipate that our
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 March 31, 2003, based on available
collateral and outstanding letter of credit commitments, there was $14.8 million
available for borrowing under our Facility.
(4) Commitments and Contingencies
On May 6, 2003, we elected to settle litigation instituted on August 20, 2000 by
Austost Anstalt Schaan, Balmore Funds, S.A. and Amro International, S.A.
Although we believed that the plaintiffs' claims were without merit, we chose to
5
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
March 31, 2003
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, payable $400,000 in cash and $350,000 in shares of the Company's
common stock, are included in the accompanying March 31, 2003 unaudited
consolidated statement of operations and in accrued expenses in the accompanying
March 31, 2003 unaudited consolidated balance sheet.
On October 12, 2000, Emergent Capital Investment Management, LLC ("Emergent")
filed suit against the Company and two of its officers contending that it was
misled by statements made by the defendants in connection with the offering of
the Company's Series C Preferred Stock which closed in March 2000. Specifically,
Emergent alleges that it is entitled to rescind the transaction because it was
allegedly represented that the size of the offering would be $20.0 million and
the Company actually raised $50.0 million. Emergent seeks a return of its $2.0
million purchase price of Series C shares. In June of 2001, the Company moved
for summary judgment in this case.
After the summary judgment motion was filed, Emergent filed a second action
against the Company and two of its officers alleging different allegations of
fraud in connection with the Series C offering. In the new complaint, Emergent
alleges that oral statements and written promotional materials distributed by
the Company at a meeting in connection with the Series C offering were
materially inaccurate with respect to the Company's investment in Net Value,
Inc., a wholly owned subsidiary of the Company. Emergent also contends that the
defendants failed to disclose certain allegedly material transactions in which
an officer was involved prior to his affiliation with the Company. The Company
filed a motion to dismiss this new action for failure to state a claim upon
which relief can be granted.
On October 2, 2001, the Court entered an order granting summary judgment to the
defendants in the first case filed by Emergent and dismissing Emergent's second
complaint for failure to state a claim upon which relief can be granted. The
Court allowed Emergent 20 days to file a second amended complaint as to the
second action only. On October 21, 2001, Emergent did file a second amended
complaint in the second action. The second amended complaint does not raise any
new factual allegations regarding Emergent's participation in the offering.
The Company filed a motion to dismiss Emergent's second amended complaint. On
April 15, 2002, the United States District Court for the Southern District of
New York entered an order granting the motion to dismiss Emergent's second
amended complaint against the Company and its former officers. The Court refused
to grant Emergent an additional opportunity to re-plead its claims against the
defendants and a final order dismissing the matter has been entered. Emergent
thereafter filed a notice of appeal to the United States Court of Appeals for
the Second Circuit, which is currently pending. The Company believes that it has
meritorious defenses to the plaintiff's claims and intends to vigorously defend
this action.
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
6
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
March 31, 2003
the Company's consolidated financial position, results of operations or
liquidity.
(5) 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
them warrants to purchase 150,000 shares of common stock at an exercise price of
$1.23 per share.
Series C Preferred Stock
In March 2000, the Company completed a private placement transaction in which it
issued 4,166,667 shares of Series C Preferred Stock and warrants to purchase
416,667 additional shares of common stock for aggregate gross proceeds of
$50,000,000.
The terms of the Series C Preferred Stock initially required the Company to use
the proceeds from this offering solely for investments in early stage Internet
companies. In February 2001, the Company received consents from the holders of
more than two-thirds of its issued and outstanding shares of Series C Preferred
Stock to modify this restriction to permit it to use the proceeds to make any
investments in the ordinary course of business, as from time-to-time determined
by the Board of Directors, or for any other business purpose approved by the
Board of Directors.
In exchange for these consents, the Company agreed to a private exchange
transaction (the "Exchange Transaction") in which it would issue to the holders
of the Series C Preferred Stock as of July 18, 2002 (the "conversion date"),
additional warrants to purchase up to a maximum of 2,692,194 shares of common
stock at an exercise price of $1.00 per share, and reduce the per share exercise
price from $26.58 to $1.00 for 307,806 existing warrants owned by the holders of
the Series C Preferred Stock. As a condition to receiving the additional
warrants and having their existing warrants re-priced, the holders of the Series
C Preferred Stock agreed to convert their shares of preferred stock into shares
of common stock on the conversion date.
At the request of the largest holder of Series C Preferred Stock (because of
legal limitations in its governing instruments which prevent it from holding
investments in common stock), the Company expanded the Exchange Transaction to
include an additional alternative. Holders of the Series C Preferred Stock as of
the conversion date were provided with the alternative of exchanging the common
stock issuable upon conversion of the Series C Preferred Stock, the additional
7
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
March 31, 2003
warrants and re-priced warrants, for shares of a newly designated Series D
Convertible Preferred Stock.
As a result of the exercise of these rights by the holders of the Series C
Preferred Stock, as of July 19, 2002, all of the Company's shares of Series C
Preferred Stock, representing approximately $44,600,000 in liquidation
preferences, together with warrants to purchase 149,457 shares of the Company's
common stock, were surrendered and retired in exchange for a combination of
securities consisting of:
o 1,911,071 shares of common stock;
o 1,543,413 warrants to purchase common stock at an exercise price of
$1.00; and
o 360,745 shares of Series D Convertible Preferred Stock.
The Series C Preferred Stock which was converted into Series D Convertible
Preferred Stock had a carrying value of approximately $21,645,000. The Company
obtained an independent appraisal which valued the Series D Convertible
Preferred Stock at approximately $4,672,000. The excess of the carrying value of
the Series C Preferred Stock over the fair value of the Series D Convertible
Preferred Stock was added to net income for purposes of computing net income
attributable to common stockholders for the year ended December 31, 2002. The
Exchange Transaction had no effect on the cash flows of the Company.
The holders of the Series C Preferred Stock earned 73,981 additional shares of
Series C Preferred Stock from payment of preferred stock dividends during the
three months ended March 31, 2002. No further preferred stock dividends were
payable on the Series C Preferred Stock after July 18, 2002.
Series D Convertible Preferred Stock
The Series D Convertible Preferred Stock is convertible into 3,607,450 shares of
common stock of the Company. In the event of any liquidation, dissolution or
winding-up of the Company prior to December 31, 2003 (which also includes
certain mergers, consolidations and asset sale transactions), holders of the
Series D Convertible Preferred Stock are entitled to a liquidation preference
equal to $60.00 per share, paid prior to and in preference to any payment made
or set aside for holders of common stock, but subordinate and subject in
preference to the prior payment in full of all amounts to which holders of other
classes of preferred stock may be entitled to receive as a result of such
liquidation, dissolution or winding-up. Subsequent to December 31, 2003, the
holders of the Series D Convertible Preferred Stock are entitled to participate
in all liquidation distributions made to the holders of the Company's common
stock on an as-if converted basis. The Series D Convertible Preferred Stock
carries no dividend, and, except under limited circumstances, has no voting
rights except as required by law. In addition, the Series D Convertible
Preferred Stock will convert into 3,607,450 shares of our common stock no later
than December 31, 2004.
8
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
March 31, 2003
Stock Options
On February 24, 2003, the Company issued to its Chief Financial Officer and one
other employee options to purchase 210,000 shares of its common stock at an
exercise price of $1.53 per share, which equaled the quoted market price on the
date of grant.
On March 10, 2003, the Company issued to its Chairman and Chief Executive
Officer options to purchase 300,000 shares of its common stock at an exercise
price of $1.68 per share, which equaled the quoted market price on the date of
grant. On that same day, the Company issued to its Chairman and Chief Executive
Officer options to purchase 400,000 shares of its common stock at an exercise
price of $2.00 per share, which represented a 19% premium over the quoted market
price of $1.68 on the date of grant.
On March 25, 2003, the Company issued to certain officers and employees options
to purchase 81,600 shares of its common stock at an exercise price of $1.81 per
share, which equaled the quoted market price on the date of grant.
(6) Earnings (Loss) per Share
Basic earnings (loss) per common share and diluted earnings (loss) per common
share are presented in accordance with SFAS No. 128, "Earnings per Share." Basic
earnings (loss) per common share has been computed using the weighted-average
number of shares of common stock outstanding during the period. Diluted earnings
(loss) per common share incorporates the incremental shares issuable upon the
assumed exercise of stock options and warrants and upon the assumed conversion
of the Company's preferred stock, if dilutive. Certain stock options, stock
warrants, and convertible securities were excluded because their effect was
antidilutive. The total numbers of such shares excluded from diluted earnings
(loss) per common share are 1,117,415 and 13,892,061 at March 31, 2003 and 2002,
respectively.
(7) Segment Information
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," established standards for reporting information about operating
segments in financial statements. Operating segments are defined as components
of an enterprise engaging in business activities about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker or group in deciding how to allocate resources and in assessing
performance. The Company determined that it had one operating segment in the
first quarter of 2002, Domestic Services, which provides a full range of
logistics and transportation services throughout North America. In the second
quarter of 2002, with the acquisition of Global Transportation Services, Inc.,
the Company established its International Services platform, which provides
international air and ocean logistics services. The Company identifies operating
segments based on the principal service provided by the business unit. Each
segment has a separate management structure. The accounting policies of the
reportable segments are the same as described in our Annual Report
9
Stonepath Group, Inc.
Notes to Unaudited Consolidated Financial Statements
March 31, 2003
on Form 10-K for the year ended December 31, 2002. Segment information, in which
corporate expenses other than the legal settlement have been fully allocated to
the operating segments, is as follows (in thousands):
Three months ended March 31, 2003
------------------------------------------------------------------
Domestic International
Services Services Corporate Total
-------------- ---------------- ----------- -----------
Revenue from external customers $23,774 $21,591 - $45,365
Intersegment revenue 34 28 - 62
Revenue from significant customer 9,835 - - 9,835
Income (loss) from operations 547 463 (750) 260
Segment assets 40,283 14,042 1,809 56,134
Segment goodwill 20,043 4,998 - 25,041
Depreciation and amortization 236 72 - 308
Capital additions 344 37 1,353 1,734
The revenue in the table below is allocated to geographic areas based upon the
location of the customer.
Three months ended March 31,
--------------------------------
2003 2002
------------- ---------------
(in thousands)
Total revenue:
United States $44,916 $13,066
Hong Kong 449 -
------------- ---------------
Total $45,365 $13,066
============= ===============
10
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
revenue consistent with recent results, (ii) our ability to sustain our recent
profitability by maintaining overall 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
additional capital necessary to make additional cash 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 common stock to facilitate
our acquisition strategy, (vi) the uncertain effect on the future trading price
of our common stock associated with the dilution upon the conversion of
outstanding convertible securities or exercise of outstanding options and
warrants, (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, and (xv) 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 Annual Report on Form 10-K for the year ended
December 31, 2002. We have assumed, for the purpose of our forward-looking
statements, that each of our operating companies will achieve, on a stand-alone
basis, that level of net income necessary to fully achieve the earn-out payments
under its acquisition agreement. With respect to our planned acquisitions,
although management is confident that these transactions will be completed on a
timely basis, they remain in preliminary stages of completion, subject to the
production of audited financial statements, completion of due diligence
analyses, securing bank and other third party approvals, and the like. Thus,
there can be no assurances that these transactions will be completed in the
expected time frame, if at all. Furthermore, our estimates as to the incremental
additional pre-tax operating income that may be realized upon completion of such
acquisitions has been developed based upon an analysis of unaudited internal
financial statements produced by the respective target companies. Upon
completion of audits of these companies' financial statements, we may be caused
to adjust our forward-looking information, and such adjustments
11
may be material. There can be no assurance that these and other factors will not
affect the accuracy of such forward-looking statements. 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.
Overview
We are a non-asset based third-party logistics services company
providing supply chain solutions on a global basis. We offer a full range of
time-definite transportation and distribution solutions through our Domestic
Services platform, where we manage and arrange the movement of raw materials,
supplies, components and finished goods for our customers. We offer a full range
of international logistics services, including international air and ocean
transportation as well as customs house brokerage services, through our
International Services platform. In addition to these core service offerings, we
also provide a broad range of value added supply chain management services,
including warehousing, order fulfillment and inventory management solutions. We
service a customer base of manufacturers, distributors and national retail
chains through a network of offices in 18 major metropolitan areas in North
America, plus two international locations, using an extensive network of over
200 independent carriers and over 150 service partners strategically located
around the world.
As a non-asset based provider of third-party logistics services, we
seek to limit our investment in equipment, facilities and working capital
through contracts and preferred provider arrangements with various
transportation providers who generally provide us with favorable rates, minimum
service levels, capacity assurances and priority handling status. The volume of
our flow of freight enables us to negotiate attractive pricing with our
transportation providers.
Our strategic objective is to build a leading global logistics services
organization that integrates established operating businesses and innovative
technologies. We plan to achieve this objective by broadening our network
through a combination of synergistic acquisitions and the organic expansion of
our existing base of operations. We are currently pursuing an aggressive
acquisition strategy to enhance our position in our current markets and to
acquire operations in new markets. The focus of this strategy is on acquiring
businesses that have demonstrated historic levels of profitability, have a
proven record of delivering high quality services, have a customer base of large
and mid-sized companies and which otherwise may benefit from our long term
growth strategy and status as a public company.
Our strategy has been designed to take advantage of shifting market
dynamics. The third party logistics industry continues to grow as an increasing
number of businesses outsource their logistics functions to more cost
effectively manage and extract value from their supply chains. Also, we believe
the industry is positioned for further consolidation as it remains highly
fragmented, and as customers are demanding the types of sophisticated and
broad-reaching service offerings that can more effectively be handled by larger,
more diverse organizations. As a non-asset based provider of third party
logistics services, we can focus on optimizing the transportation solution for
our customers, rather than on our own asset utilization. Our non-asset based
approach allows us to maintain a high level of operating flexibility and
leverage a cost structure that is highly variable in nature.
12
Our acquisition strategy relies upon two primary factors: first, our
ability to identify and acquire target businesses that fit within our general
acquisition criteria and, second, the continued availability of capital and
financing resources sufficient to complete these acquisitions. Our growth
strategy relies upon a number of factors, including our ability to efficiently
integrate the businesses of the companies we acquire, generate the anticipated
economies of scale from the integration, and maintain the historic sales growth
of the acquired businesses so as to generate continued organic growth. The
business risks associated with these factors are identified or referred to above
under our "Cautionary Statement for Forward-Looking Statements."
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 total revenue.
Our operating results will be affected as acquisitions occur. Since all
acquisitions are made using the purchase method of accounting for business
combinations, our financial statements will only include the results of
operations and cash flows of acquired companies for periods subsequent to the
date of acquisition. Accordingly, our results of operations only reflect the
operations of: M.G.R., Inc. d/b/a "Air Plus Limited" ("Air Plus") for periods
subsequent to October 5, 2001; Global Transportation Services, Inc. ("Global")
for periods subsequent to April 4, 2002; United American Freight Services, Inc.
("United American") for periods subsequent to May 30, 2002; and Transport
Specialists, Inc. ("TSI") for periods subsequent to October 1, 2002.
Our operating results are also subject to seasonal trends when measured
on a quarterly basis. Our first and second quarters are likely to be weaker as
compared with our other fiscal quarters, which we believe is consistent with the
operating results of other supply chain service providers. This trend is
dependent on numerous factors, including the markets in which we operate,
holiday seasons, consumer demand and economic conditions. Since our revenue is
13
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
for the year ended December 31, 2002 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, there have been no material
changes to our critical accounting policies or the methodologies or assumptions
applied under them.
Results of Operations
Basis of Presentation
Our results of operations are presented in a manner that is intended to
provide meaningful data with respect to our transition to and ongoing operations
as a third-party logistics company. Since Global and United American were
acquired in the second quarter of 2002, our historical results for the first
quarter of 2002 only reflect the operations of Air Plus. Accordingly, in
addition to providing comparative analysis on a historical basis, we have also
provided supplemental pro forma information that we believe is useful to an
understanding of how our results of operations have performed on a quarter on
quarter basis. The pro forma results of operations for the period ended March
31, 2002 are unaudited and presented as if we had acquired Global and United
American (collectively the "Material Acquisitions") as of January 1, 2002. The
unaudited pro forma results reflect a consolidation of the historical results of
operations of the Material Acquisitions, as adjusted to reflect contractual
adjustments to officers' compensation at the companies comprising the Material
Acquisitions, amortization of acquired intangibles and income taxes.
14
Quarter ended March 31, 2003 (Actual) compared to quarter ended March
31, 2002 (Actual)
The following table compares our historical total revenue, net
transportation and other revenue (in thousands):
Quarter ended March 31,
-------------------------------------------
2003 2002 Percent
-------- ------- -------
Total revenue $45,365 $13,066 247.2%
======== ======
Transportation revenue $42,573 $12,583 238.3
Cost of transportation 33,181 8,646 283.8
-------- ------
Net transportation revenue 9,392 3,937 138.6
Net transportation margins 22.1% 31.3%
Customs brokerage 1,864 - NM
Warehousing and other
value added services 928 483 92.1
-------- ------
Total net revenue $ 12,184 $4,420 175.7%
======== ======
Total revenue was $45.4 million in the first quarter of 2003, an
increase of 247.2% over total revenue of $13.1 million in the first quarter of
2002. $27.7 million or 85.8% of the increase in total revenue was attributable
to acquisitions with $4.6 million or 14.2% of the increase attributable to
organic growth. Net transportation revenue was $9.4 million in the first quarter
of 2003, an increase of 138.6% over net transportation revenue of $3.9 million
in the first quarter of 2002. $3.9 million or 72.6% of the increase in net
transportation revenue was attributable to acquisitions with $1.6 million or
27.4% of the increase attributable to organic growth. Net revenue was $12.2
million in the first quarter of 2003, an increase of 175.7% over net revenue of
$4.4 million in the first quarter of 2002. $6.0 million or 76.3% of the increase
in net revenue was attributable to acquisitions with $1.8 million or 23.7% of
the increase attributable to organic growth. Net transportation margins
decreased to 22.1% for the first quarter of 2003 from 31.3% for the first
quarter of 2002. This decrease in historical transportation margins is primarily
the result of the addition of our international services, which traditionally
have lower margins.
15
The following table compares certain historical consolidated statement of
operations data as a percentage of our net revenue (in thousands):
Quarter ended March 31,
------------------------------------------------------------------------
2003 2002 Change
--------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent
------- ------- ------ ------- ------ -------
Net revenue $12,184 100.0 $4,420 100.0 $7,764 175.7
------- ----- ------ ----- ------
Personnel costs 6,563 53.9 2,593 58.7 3,970 153.1
Other selling, general and administrative 4,610 37.8 2,846 64.4 1,764 62.0
Litigation settlement 750 6.2 -- -- 750 NM
------- ----- ------ ----- ------
Total operating costs 11,923 97.9 5,439 123.1 6,484 119.2
------- ----- ------ ----- ------
Income (loss) from operations 261 2.1 (1,019) (23.1) 1,280 NM
Other income, net 29 0.2 55 1.3 (26) (47.3)
------- ----- ------ ----- ------
Income (loss) before income taxes 290 2.4 (964) (21.8) 1,254 NM
Income taxes 15 0.1 -- -- 15 NM
------- ----- ------ ----- ------
Net income (loss) 275 2.3 (964) (21.8) 1,239 NM
Preferred stock dividends -- -- (888) (20.1) 888 NM
------- ----- ------ ----- ------
Net income (loss) attributable to common
stockholders $275 2.3 $(1,852) (41.9) $2,127 NM
======= ===== ====== ===== ======
Personnel costs were $6.6 million for the first quarter of 2003, an
increase of 153.1% over $2.6 million for the first quarter of 2002. $3.2 million
or 80.1% of the increase in personnel costs is attributable to incremental costs
assumed as part of our acquisition program with $0.8 million or 19.9% of the
increase attributable to increased costs in the base business. Personnel costs
as a percentage of net revenue decreased to 53.9% in the first quarter of 2003
from 58.7% in the first quarter of 2002.
Other selling, general and administrative costs were $4.6 million for
the first quarter of 2003, an increase of 62.0% over $2.8 million for the first
quarter of 2002. $1.2 million or 69.7% of the increase is attributable to
incremental costs assumed as part of our acquisition program with $0.5 million
or 30.3% 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 37.8% in the first quarter of 2003 from 64.4% in the first quarter
of 2002, which is indicative of the scalability of our business model.
Litigation settlement charges resulted from the settlement of
litigation that arose prior to our transition to a logistics business, payable
$400,000 in cash and $350,000 in shares of the Company's common stock.
Income from operations was $0.3 million in the first quarter of 2003,
as compared to a loss of $1.0 million for the first quarter of 2002. Income from
operations as a percentage of net revenue increased to 2.1% for the first
quarter of 2003 from (23.1)% for the same period in 2002.
Other income, net decreased modestly in 2003 compared to 2002. With
quarter over quarter cash balances being reduced as a result of our acquisition
16
program, interest income remained an insignificant component to the Company's
overall financial performance for the first quarter of 2003 and 2002.
As a result of historical losses related to investments in early-stage
technology businesses, the Company has accumulated federal net operating loss
carryforwards ("NOLs"). Although a portion of this loss may be subject to
certain limitations, the Company expects it will be able to use approximately
$21.7 million of the loss to offset current and future federal taxable income.
As a result, the Company is currently only subject to certain state and local
taxes which are immaterial to the Company's quarterly financial results.
Net income was $0.3 million in the first quarter of 2003, an
improvement of $1.2 million over a loss of $1.0 million in the first quarter of
2002.
The Company recorded no preferred stock dividends in the first quarter
of 2003 as compared to $0.9 million for the first quarter of 2002 as a result of
the restructuring of our Series C Preferred Stock effective July 18, 2002. See
Note 5 to the unaudited consolidated financial statements.
Net income attributable to common stockholders was $0.3 million in the
first quarter of 2003, an improvement of $2.1 million over a net loss
attributable to common stockholders of $1.9 million in the first quarter of 2002
due partially to the effect of the $0.9 million preferred stock dividend. Basic
and diluted earnings per common share were $0.01 for the first quarter of 2003
compared to a loss of $0.09 per basic and diluted common share for the first
quarter of 2002.
17
Supplemental Pro Forma Information
Quarter ended March 31, 2003 (Actual) compared to quarter ended March 31, 2002
(Pro forma)
In accordance with SEC Regulation G, we present the following table,
which reconciles our actual results of operations to pro forma results of
operations for the three months ended March 31, 2002.
Three months ended March 31, 2002
----------------------------------------------------------------------------------------
Pro forma
As reported Global United American adjustments Pro forma
------------ ------------ --------------- ----------- -------------
Total revenue $ 13,065,560 $ 12,434,007 $ 7,505,346 $ -- $ 33,004,913
Cost of transportation 8,645,969 8,925,993 5,668,470 -- 23,240,432
------------- ------------ ----------- ----------- -----------
Net revenue 4,419,591 3,508,014 1,836,876 -- 9,764,481
Personnel costs 2,593,076 1,511,120 620,278 57,540 (1) 4,782,014
Other selling, general and
administrative costs 2,846,259 783,899 819,051 35,500 (2) 4,484,709
------------- ------------ ----------- ----------- -----------
Income (loss) from operations (1,019,744) 1,212,995 397,547 (93,040) 497,758
Other income (expense)
Interest income 55,457 281 (55,457)(3) 281
Other, net -- 1,333 (39,337) -- (38,004)
------------- ------------ ----------- ----------- -----------
Income (loss) before income
taxes (964,287) 1,214,609 358,210 (148,497) 460,035
Income taxes -- -- -- 12,779 (4) 12,779
------------- ------------ ----------- ----------- -----------
Net income (loss) (964,287) 1,214,609 358,210 (161,276) 447,256
Preferred stock dividends (887,772) -- -- -- (887,772)
------------- ------------ ----------- ----------- -----------
Net income (loss) attributable
to common stockholders $ (1,852,059) $ 1,214,609 $ 358,210 $ (161,276) $ (440,516)
============= ============ =========== =========== ===========
(1) To reflect contractual changes to officers' compensation.
(2) To reflect amortization of acquired identifiable intangibles.
(3) To eliminate interest income as a result of a reduced cash balance due to the payment of approximately $10.6 million for the
Material Acquisitions.
(4) To reflect state taxes payable on pro forma income (loss) before income taxes.
18
The following table compares our actual total revenue, net
transportation revenue and other revenue for March 31, 2003 to our pro forma
data for March 31, 2002 to provide comparable data as if the Material
Acquisitions had been acquired effective January 1, 2002 (in thousands):
Quarter ended March 31,
----------------------------------
Percent
2003 2002 Change
---- ---- ------
Total revenue $45,365 $33,005 37.4%
======= =======
Transportation revenue $42,573 $30,347 40.3
Cost of transportation 33,181 23,240 42.8
------- -------
Net transportation revenue 9,392 7,107 32.2
Net transportation margins 22.1% 23.4%
Customs brokerage 1,864 1,939 (3.9)
Warehousing and other
value added services 928 718 29.2
------- -------
Total net revenue $12,184 $ 9,764 24.8%
======= =======
Total revenue was $45.4 million in the first quarter of 2003, an
increase of 37.4% over total pro forma revenue of $33.0 million in the first
quarter of 2002. This increase in total revenue was driven principally by growth
in transportation revenue. Net transportation revenue was $9.4 million in the
first quarter of 2003, an increase of 32.2% over pro forma net transportation
revenue of $7.1 million in the first quarter of 2002. Net transportation margins
decreased to 22.1% in the first quarter of 2003 from 23.4% in the first quarter
of 2002, driven by a higher proportionate increase in our international
services, which traditionally have lower margins. Net revenue was $12.2 million
in the first quarter of 2003, an increase of 24.8% over pro forma net revenue of
$9.8 million in the first quarter of 2002, driven primarily by an increase in
net transportation revenue.
19
The following table summarizes certain statement of operations data as a
percentage of our net revenue on an actual basis for 2003 and on a pro forma
basis in 2002 as if the Material Acquisitions had been acquired effective
January 1, 2002 (in thousands):
Quarter ended March 31,
-----------------------------------------------------------------------
2003 2002 Change
-------------------- -------------------- ----------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Net revenue $12,184 100.0% $ 9,765 100.0% $ 2,419 24.8%
------- ----- ------- ----- -------
Personnel costs 6,563 53.9 4,782 49.0 1,781 37.2
Other selling, general and administrative 4,610 37.8 4,485 45.9 125 2.8
Litigation settlement 750 6.2 -- -- 750 NM
------- ----- ------- ----- -------
Total operating costs 11,923 97.9 9,267 94.9 2,656 28.7
------- ----- ------- ----- -------
Income from operations 261 2.1 498 5.1 (237) (47.7)
Other income (expense) 29 0.2 (38) (0.4) 67 NM
------- ----- ------- ----- -------
Income before income taxes 290 2.4 460 4.7 (170) (37.0)
Income taxes 15 0.1 13 0.1 2 15.4
------- ----- ------- ----- -------
Net income $ 275 2.3% $ 447 4.6% $ (172) (38.5)%
======= ===== ======= ===== =======
Personnel costs were $6.6 million for the first quarter of 2003, an
increase of 37.2% over $4.8 million for the first quarter of 2002. Personnel
costs as a percentage of net revenue increased to 53.9% in the first quarter of
2003 from 49.0% in the first quarter of 2002. This increase is primarily
attributable to the Company's efforts to position itself for continued growth
through additional resources deployed in sales, technology and back-office
operations. On a quarter on quarter basis, total employees increased from 424 in
2002 to 512 in 2003.
Other selling, general and administrative costs were $4.6 million for
the first quarter of 2003, which were relatively flat compared to $4.5 million
in the first quarter of 2002. As a percentage of net revenue, other selling,
general and administrative costs decreased to 37.8% in the first quarter of 2003
from 45.9% in the first quarter of 2002, which is indicative of the scalability
of our business model.
Litigation settlement charges resulted from the settlement of
litigation that arose prior to our transition to a logistics business, payable
$400,000 in cash and $350,000 in shares of the Company's common stock.
Income from operations was $0.3 million in the first quarter of 2003, a
decrease of 47.7% over $0.5 million for the first quarter of 2002. Income from
operations as a percentage of net revenue decreased to 2.1% in 2003 from 5.1% in
2002.
Other income (expense) decreased modestly in 2003 compared to 2002,
remaining an insignificant component of the Company's overall financial
performance for the first quarter of 2003 and 2002.
20
As a result of historical losses related to investments in early-stage
technology businesses, the Company has accumulated federal NOLs. Although a
portion of these losses may be subject to certain limitations, the Company
expects it will be able to use approximately $21.7 million of these losses to
offset current and future federal taxable income. As a result, the Company is
currently only subject to certain state and local taxes which are immaterial to
the Company's quarterly financial results.
Net income was $0.3 million in the first quarter of 2003, a decrease of
38.5% compared to $0.4 million for the first quarter of 2002. Net income for the
first quarter of 2003, however, includes $0.8 million in charges related to the
settlement of litigation that arose in August of 2000 prior to the Company's
transition to a logistics business.
Financial Outlook
We completed our transformation into a global logistics enterprise in
2002 and we now offer a robust set of domestic and international supply chain
services. Based on existing operations, we expect to generate approximately $7.0
million of net earnings in 2003 on an estimated $180.0 million in revenue,
including the non-recurring litigation charge of $750,000. Our revenue and net
income estimates have been developed based on a number of principal assumptions
including, among others: (i) that revenue and net income will continue to grow
at an annual rate that is consistent with recent results; (ii) that operating
margins will remain at least at current levels; (iii) that no material economic
or customer disruptions will occur; (iv) that each of our operating companies on
a stand-alone basis will deliver the level of pre-tax operating income necessary
to fully achieve the earn-out payments under each of their acquisition
agreements; and (v) that the risks otherwise identified in our Annual Report on
Form 10-K for the year ended December 31, 2002 under "Risks Particular to our
Business" will not have an adverse effect on our operations.
We may complete one or more transactions over the remainder of 2003
which would provide incremental earnings to the current guidance. We continue to
make progress on our previously announced plans to acquire a 70% interest in the
Singapore based G-Link group of companies ("G-Link"). This acquisition is
intended to provide the platform for our service offerings in Southeast Asia. We
are also making progress in the acquisition of a mid-Atlantic based company that
specializes in providing transportation solutions for governmental agencies and
associated projects. Although the SARS situation has protracted our timeline
with respect to the G-Link transaction, we expect both transactions to close
during or before the third quarter of 2003. Once completed, we expect these
acquisitions could add an estimated $3.5 million to our pre-tax income in 2004.
We may record a non-cash tax benefit in 2003 in recognition of the
value associated with our net deferred tax assets, which is not reflected in our
$7.0 million net earnings guidance. Given the possibility of recognizing this
non-cash benefit some time in the future, and under the assumption that over
time we will make use of the NOLs available to us and become a "full taxpayer",
a key measurement of our ongoing financial performance will be the
period-on-period change in pre-tax operating income.
21
We look to continue to drive shareholder value through four areas of
growth:
o Organic Growth - Although the overall industry is projected to grow at
a rate in the range of 15.0%-20.0% per year, we are targeting organic
annual growth rates in the range of 10.0% - 12.0%.
o Acquisitive Growth - We expect to deploy $10.0 to $20.0 million in
acquisition capital over the course of 2003, including our pending
acquisitions, funded through a combination of existing cash, draws
upon our credit facility, the proceeds of new financings and the value
of newly issued securities. Based on our acquisition model, this could
generate incremental annualized pre-tax operating income in the range
of $4.0 to $8.0 million per year.
o Margin Expansion - Our business model is scalable in nature, and as
we aggregate and leverage our purchasing power and grow our business,
we expect to deliver year-on-year improvement in our operating
margins.
o Price/Earnings ("P/E") Expansion - On a P/E basis, we are trading at a
considerable discount to other publicly traded third-party logistics
companies. As we execute our plans and become better known by the
investment community, we would expect to receive a P/E closer to that
of our peers.
Assuming we can continue to execute on our business plan and
acquisition model without any material disruptions, and identify and close
transactions similar to transactions accomplished to date, it is our goal to
generate $500.0 million in annualized revenue by the end of 2006.
Notwithstanding our expectations regarding our ability to deliver these
results, we can never be certain that future revenue or earnings will be
achieved at any particular level. Estimates of future financial performance are
forward-looking statements and are subject to uncertainty created by the risk
elements otherwise identified in our Annual Report on Form 10-K for the year
ended December 31, 2002 under "Risks Particular to our Business." Furthermore,
even though we believe our current operations will achieve a certain level of
earnings on an annual basis, our results are subject to seasonal trends. For
2002 and 2001, on a pro forma basis, approximately 21% of our annual total
revenue and a small percentage of our annual income were generated in the first
quarter. Thereafter, volume and income typically accelerate for the remainder of
the year, with the third and fourth quarters showing the greatest improvement.
Liquidity and Capital Resources
Prior to the adoption of our current business model, our operations
consisted of developing early-stage technology businesses. These operations did
not generate sufficient operating funds to meet our cash needs, and, as a
result, we funded our historic operations with the proceeds from a number of
private placements of debt and equity securities. With the advent of our new
business model, we expect to be able to fund our operations with the cash flow
generated by the subsidiaries we acquire. We are also in an acquisitive mode and
expect to deploy material amounts of capital as we execute our business plan.
Therefore, it is likely that we will need to raise additional capital in the
future. There can be no assurance that we will be able to raise additional
capital on terms acceptable to us, if at all.
22
Cash and cash equivalents totaled $2.7 million and $2.3 million as of
March 31, 2003 and December 31, 2002, respectively. Working capital totaled
$10.0 million and $5.3 million at March 31, 2003 and December 31, 2002,
respectively.
Cash used in operating activities was $0.7 million for the first
quarter of 2003 compared to $2.6 million used in the first quarter of 2002. This
quarter on quarter improvement was driven principally by the satisfaction of
liabilities in the first quarter of 2002 related to our discontinued technology
business that did not impact our use of cash in the first quarter of 2003.
Net cash used in investing activities during the first quarter of 2003
was $4.6 million compared to $0.1 million in the first quarter of 2002.
Investing activities were driven principally by approximately $2.8 million in
earn-out payments made in relation to 2002 performance targets and $1.0 million
in the roll-out of Tech-Logis(TM), the Company's new web-based technology
platform.
Cash from financing activities in the first quarter of 2003 related to
a private placement of 4,470,000 shares of our common stock in exchange for
gross proceeds of approximately $6.1 million. This placement yielded net
proceeds of $5.7 million for the Company, after the payment of placement agent
fees and other out-of-pocket costs.
On July 18, 2002 we completed a private exchange transaction that
eliminated approximately $44.6 million in liquidation value of our Series C
Preferred Stock. The terms of the Series C Preferred Stock would have
significantly constrained our future growth opportunities. In return for
eliminating the Series C Preferred Stock, we issued 1,911,071 shares of common
stock, warrants to purchase 1,543,413 shares of common stock at an exercise
price of $1.00 per share for a term of three (3) years, and a new class of
Series D Convertible Preferred Stock that will convert into 3,607,450 shares of
our common stock no later than December 31, 2004. The terms of the Series D
Convertible Preferred Stock were structured to make it much like a common equity
equivalent in that (1) it receives no dividend; (2) it is subordinated to new
rounds of equity; and (3) it holds a limited liquidation preference (expiring at
the end of 2003). In addition, the holders of the Series D Convertible Preferred
Stock are restricted from selling the common stock received upon conversion of
the Series D Convertible Preferred Stock until July 19, 2003 (or earlier if the
stock trades at or above $4.50) and then are permitted limited resale based on
trading volume through July 19, 2004.
We may also receive proceeds in the future from the exercise of
existing options and warrants. As of March 31, 2003, approximately 13,231,000
options and warrants were outstanding. Of these outstanding securities, there
are approximately 271,000 that have an exercise price of $5.00 per share or
higher. If we exclude those options and warrants from our diluted share count,
our outstanding diluted shares, as adjusted, would be approximately 44,513,000
shares. Excluding options and warrants with an exercise price of $5.00 or
higher, the proceeds received by the Company, if all of the remaining options
and warrants were exercised, would be approximately $15.0 million.
23
We believe that our current working capital and anticipated cash flow
from operations are adequate to fund existing operations. Through cash resources
and our existing credit facility, we believe we have sufficient capital to
implement our acquisition strategy in the short term. However, we will need
additional financing to pursue our acquisition strategy in the longer term. We
intend to finance these acquisitions primarily through the use of cash, funds
from our debt facility, and shares of our common stock or other securities. In
the event that our common stock does not attain or maintain a sufficient market
value or potential acquisition candidates are otherwise unwilling to accept our
securities as part of the purchase price for the sale of their businesses, we
may be required to utilize more of our cash resources, if available, in order to
continue our acquisition program. If we do not have sufficient cash resources
through either operations or from debt facilities, our growth could be limited
unless we are able to obtain such additional capital.
We are currently working on a number of possible acquisition
opportunities. These range in status from the stage of preliminary discussion to
definitive agreement, pending closing. We continue to make progress on the
acquisition of a 70% interest in Singapore-based G-Link. We are also making
progress on the acquisition of a mid-Atlantic based company that specializes in
providing transportation solutions for governmental agencies and associated
projects. At the closing of these transactions, we expect to pay approximately
$6.7 million in cash and between $3.2 to $4.2 million in shares of our common
stock. Both acquisitions would also be subject to supplemental earn-out
obligations based upon the acquired companies' post-acquisition results of
operations. We expect both of these transactions to close during or before the
third quarter of 2003, although closing remains subject to a number of
conditions which have not yet been satisfied.
To ensure that we have adequate near-term liquidity, we maintain a
revolving credit facility of $15.0 million (the "Facility") with LaSalle
Business Credit, Inc. that is collateralized by accounts receivable and other
assets of the Company and its subsidiaries. The Facility requires the Company
and its subsidiaries to comply with certain financial covenants. Advances under
the Facility are available to fund future acquisitions, capital expenditures or
for other corporate purposes. There were no advances against the Facility at
March 31, 2003. We expect that the cash flow from our existing operations and
any other subsidiaries acquired during the year will be sufficient to support
our corporate overhead and some portion, if not all, of the contingent earn-out
payments or other cash requirements associated with our acquisitions. Therefore,
we anticipate that our primary uses of capital in the near term will be to
finance the cost of new acquisitions and to pay any portion of existing earn-out
arrangements that cash flow from operations is otherwise unable to fund.
The acquisition of Air Plus was completed subject to an earn-out
arrangement of $17.0 million. We agreed to pay the former Air Plus shareholders
installments of $3.0 million in 2003, $5.0 million in 2004, $5.0 million in 2005
and $4.0 million in 2006, with each installment payable in full if Air Plus
achieves pre-tax income of $6.0 million in each of the years preceding the year
of payment. In the event there is a shortfall in pre-tax income, the earn-out
payment will be reduced on a dollar-for-dollar basis to the extent of the
shortfall. Shortfalls may be carried over or carried back to the extent that
pre-tax income in any other pay-out year exceeds the $6.0 million level. Based
upon 2002 performance, former Air Plus shareholders were entitled to receive
$3.0 million, and will have excess earnings of $0.3 million as a carryforward to
future earnings targets. Former Air Plus shareholders elected to receive $2.6
million in cash with the balance payable in shares of the Company's common stock
in April 2003.
24
On April 4, 2002, we acquired Global, a Seattle-based privately-held
company that provides a full range of international air and ocean logistics
services. The transaction was valued at up to $12.0 million, consisting of cash
of $5.0 million paid at the closing and up to an additional $7.0 million payable
over a five year earn-out period based upon the future financial performance of
Global. We agreed to pay the former Global shareholders a total of $5.0 million
in base earn-out payments in installments of $0.7 million in 2003, $1.0 million
in 2004 through 2007 and $0.3 million in 2008, with each installment payable in
full if Global achieves pre-tax income of $2.0 million in each of the years
preceding the year of payment (or the pro rata portion thereof in 2002 and
2007). In the event there is a shortfall in pre-tax income, the earn-out payment
will be reduced on a pro rata basis. Shortfalls may be carried over or carried
back to the extent that pre-tax income in any other pay-out year exceeds the
$2.0 million level. The Company has also provided former Global shareholders
with an additional incentive to generate earnings in excess of the base $2.0
million annual earnings target ("tier-two earn-out"). Under Global's tier-two
earn-out, former Global shareholders are also entitled to receive 40% of the
cumulative pre-tax earnings in excess of $10.0 million generated during the
five-year earn-out period subject to a maximum additional earn-out opportunity
of $2.0 million. Global would need to generate cumulative earnings of $15.0
million over the five-year earn-out period to receive the full $7.0 million in
contingent earn-out payments. Based upon 2002 performance, former Global
shareholders received $0.7 million on April 1, 2003, and will have excess
earnings of $2.3 million as a carryforward to future earnings targets.
On May 30, 2002 we acquired United American, a Detroit-based
privately-held provider of expedited transportation services. The United
American transaction provided us with a new time-definite service offering
focused on the automotive industry. The transaction is valued at up to $16.1
million, consisting of cash of $5.1 million paid at closing and a four-year
earn-out arrangement based upon the future financial performance of United
American. We agreed to pay the former United American shareholder a total of
$5.0 million base earn-out payments in installments of $1.25 million in 2003
through 2006, with each installment payable in full if United American achieves
pre-tax income of $2.2 million in each of the years preceding the year of
payment. In the event there is a shortfall in pre-tax income, the earn-out
payment will be reduced on a dollar-for-dollar basis to the extent of the
shortfall. Shortfalls may be carried over or carried back to the extent that
pre-tax income in any other pay-out year exceeds the $2.2 million level. The
Company has also provided the former United American shareholder with an
additional incentive to generate earnings in excess of the base $2.2 million
annual earnings target ("tier-two earn-out"). Under United American's tier-two
earn-out, the former United American shareholder is also entitled to receive 50%
of the cumulative pre-tax earnings generated by a certain pre-acquisition
customer in excess of $8.8 million during the four year earn-out period subject
to a maximum additional earn-out opportunity of $6.0 million. United American
would need to generate cumulative earnings of $20.8 million over the four-year
earn-out period to receive the full $11.0 million in contingent earn-out
payments. Based upon 2002 performance, the former United American shareholder
was entitled to receive $0.2 million, which he received in the first quarter of
2003, and has an earnings shortfall of $1.0 million. In future years, earnings
in excess of the $2.2 million earnings target would first be applied against the
$1.0 million shortfall.
On October 1, 2002 we acquired TSI, a Northern Virginia-based
privately-held provider of expedited domestic and international transportation
services. The TSI transaction capitalized on TSI's existing base of government
contract work in the Washington metropolitan area and served as a supplement to
an existing Company-operated facility in that area. The transaction was valued
at up to $1.1 million, consisting of cash of $0.5 million paid at closing, and a
three-year earn-out arrangement. The Company agreed to pay the former TSI
shareholder $0.2 million for each year in the three-year earn-out period ending
December 31, 2005, based upon the annual net revenue targets of $1.6 million. In
the event there is a shortfall in net revenue, the earn-out payment will be
reduced proportionally to the extent of the shortfall, provided no earn-out
payment shall be made if net revenue for the year falls below $1.0 million.
Shortfalls may be carried over or carried back to the extent that net revenue in
any other pay-out year exceeds the $1.6 million level.
25
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.
The following table summarizes our contingent base earn-out payments
(in thousands)(1)(2):
2004 2005 2006 2007 2008 Total
---------- ---------- ---------- ---------- ---------- ----------
Earn-out payments:
Domestic $ 6,540 $ 6,540 $ 5,550 $ - $ - $ 18,630
International 1,000 1,000 1,000 1,000 255 4,255
---------- ---------- ---------- ---------- ---------- -----------
Total earn-out payments $ 7,540 $ 7,540 $ 6,550 $ 1,000 $ 255 $ 22,885
========== ========== ========== ========== ========== ===========
Prior year pre-tax earnings targets:
Domestic $ 8,806 $ 8,806 $ 8,806 $ - $ - $ 26,418
International 2,000 2,000 2,000 2,000 510 8,510
---------- ---------- ---------- ---------- ---------- -----------
Total pre-tax earnings targets $ 10,806 $ 10,806 $ 10,806 $ 2,000 $ 510 $ 34,928
========== ========== ========== ========== ========== ===========
Earn-outs as a percentage of prior year pre-tax earnings targets:
Domestic 74.3% 74.3% 63.0% -- -- 70.5%
International 50.0% 50.0% 50.0% 50.0% 50.0% 50.0%
Combined 69.8% 69.8% 60.6% 50.0% 50.0% 65.5%
- ----------------
(1) Excludes the impact of prior year's pre-tax earnings carryforwards (excess
or shortfalls versus earnings targets).
(2) During the 2003-2007 earn-out period, there is an additional contingent
obligation related to tier-two earn-outs that could be as much as $8.0
million if the applicable acquired companies generate an incremental $17.0
million in pre-tax earnings.
On May 6, 2003, we elected to settle litigation instituted on August
20, 2000 by Austost Anstalt Schaan, Balmore Funds, S.A. and Amro International,
S.A. Although we believed that the Plaintiffs' claims were without merit, we
chose to settle the matter at that time in order to remove any cloud of
uncertainty created by nominal claims in excess of $20 million, to avoid future
litigation costs and to mitigate the diversion of management attention from
operations.
Notwithstanding the settlement, the Company remains subject to one
remaining material legal proceeding that arose prior to our transition to a
logistics business. That proceeding has been identified in our Annual Report on
Form 10-K for the year ended December 31, 2002. Although we believe that the
claims asserted in this proceeding are without merit, and we intend to
vigorously defend this matter, there is the possibility that the Company could
incur material expenses in the defense and resolution of this matter.
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.
26
New Accounting Pronouncements
In December 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure," which (i) amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for an entity that voluntarily changes the fair value
based method of accounting for stock-based employee compensation, (ii) amends
the disclosure provisions of SFAS No. 123 to require prominent disclosure about
the effects on reported net income of an entity's accounting policy decisions
with respect to stock-based employee compensation and (iii) amends Accounting
Principles Board Opinion No. 28, "Interim Financial Reporting," to require
disclosure about those effects in interim financial information. Items (ii) and
(iii) in the new requirements of SFAS No. 148 are effective for financial
statements for fiscal years ending after December 15, 2002. The Company has
adopted the disclosure requirements described in items (ii) and (iii).
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities," which provides new guidance with respect to the
consolidation of all unconsolidated entities, including special purpose
entities. The adoption of Interpretation No. 46 in 2003 is not expected to
impact the Company's consolidated financial statements as the Company does not
have investments in any unconsolidated special purpose or variable interest
entities.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We do not use derivative financial instruments in our investment
portfolio. We invest our excess cash in institutional money market accounts.
Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may have
their fair market value adversely impacted due to a rise in interest rates,
while floating rate securities may produce less income than expected if interest
rates fall. Due in part to these factors, our future investment income may fall
short of expectations due to changes in interest rates or it may suffer losses
in principal if forced to sell securities which have declined in market value
due to changes in interest rates. If market interest rates were to change by 10%
from the levels at March 31, 2003, the fair value of our portfolio would be
impacted by an immaterial amount.
Item 4. Controls and Procedures
Within 90 days prior to the filing date of this report, our management
conducted an evaluation, under the supervision and with the participation of the
Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934.
Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are effective in
timely alerting them to material information required to be included in our
periodic SEC reports.
In addition, since the date of our evaluation, there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls.
27
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Other than as described in the Company's Annual Report on Form 10-K for
the year ended December 31, 2002, there have been no material developments in
any of the reported legal proceedings, except as described below.
With respect to the litigation instituted on August 20, 2000 by Austost
Anstalt Schaan, Balmore Funds, S.A. and Amro International, S.A., the parties
have entered into a Settlement Agreement with the Company on May 6, 2003,
pursuant to which the controversy has been settled, the litigation withdrawn and
mutual releases executed.
The Company is involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse effect on
the Company's overall consolidated financial position, results of operations or
liquidity.
Item 2. Changes in Securities and Use of Proceeds
On March 6, 2003, we issued 4,470,000 shares of our common stock
consisting of the sale of 4,270,000 shares at $1.35 per share and 200,000 shares
at $1.54 per share, to the accredited investors identified below 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. In connection with this
transaction, we realized gross proceeds of approximately $6.1 million and paid
to Stonegate Securities, Inc. a brokerage fee consisting of cash commissions of
approximately $364,000 and placement agent warrants to purchase 297,000 shares
of our common stock at an exercise price of $1.49 per share. The placement agent
warrants were also issued in a transaction exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
28
Name Shares of Common Stock Price
---- ---------------------- -----
George B. Clairmont 5-8-51 Trust 60,000 $1.35
George B. Clairmont 60,000 $1.35
Ponte Vedra Partners Ltd. 100,000 $1.35
Ingleside Company 200,000 $1.35
Oberweis Micro-Cap Portfolio 100,000 $1.35
BFS US Special Opportunities Trust PLC 400,000 $1.35
Renaissance US Growth Investment Trust PLC 200,000 $1.35
Renaissance Capital Growth & Income Fund III, Inc. 200,000 $1.35
Sherleigh Associates Inc. Profit Sharing Plan 400,000 $1.35
SBL Fund Series V 520,000 $1.35
Security Equity Fund - Mid Cap Value Series 480,000 $1.35
MidSouth Investor Fund LP 100,000 $1.35
Atlas Capital (Q.P.), L.P. 59,025 $1.35
Atlas Capital Master Fund, Ltd. 190,975 $1.35
A. Spector Capital, LLC 500,000 $1.35
Crestview Capital Fund I, L.P. 185,000 $1.35
Crestview Capital Fund II, L.P. 235,000 $1.35
Crestview Capital Offshore Fund, Inc. 30,000 $1.35
Gryphon Master Fund, LP 200,000 $1.35
London Family Trust 50,000 $1.35
London Family Trust 25,000 $1.54
Scott R. Griffith SEP IRA 31,800 $1.54
Stonegate Securities, Inc. 43,200 $1.54
Dennis L. Pelino 100,000 $1.54
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
29
(b) The Company filed the following Current Report on Form 8-K during
the three-month period ended March 31, 2003:
(i) Current Report on Form 8-K, dated February 4, 2003. The Company
filed the foregoing Current Report on Form 8-K reporting under
Item 9 that members of the Company's senior management were
scheduled to participate in conferences with certain
institutional investors in connection with a proposed private
placement transaction. The Report also identified information
that was to be provided by the Company to the prospective
investors, including certain forward-looking information and
earnings.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STONEPATH GROUP, INC.
Date: May 14, 2003 Dennis L. Pelino
-------------------------------------
Dennis L. Pelino
Chief Executive Officer and
Chairman of the Board of Directors
Date: May 14, 2003 Bohn H. Crain
-------------------------------------
Bohn H. Crain
Chief Financial Officer and Treasurer
Date: May 14, 2003 Thomas L. Scully
-------------------------------------
Thomas L. Scully
Vice President and Controller and
Principal Accounting Officer
31
CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Dennis L. Pelino, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Stonepath Group,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"), and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors;
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material that involves management or
other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
DATE: May 14, 2003
------------
BY: Dennis L. Pelino
------------------------------------
Dennis L. Pelino
Chairman and Chief Executive Officer
32
CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Bohn H. Crain, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Stonepath Group,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"), and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors;
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material that involves management or
other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
DATE: May 14, 2003
BY: Bohn H. Crain
-------------------------------------
Bohn H. Crain
Chief Financial Officer and Treasurer
33