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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 001-16105
STONEPATH GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 65-0867684
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1600 Market Street, Suite 1515, Philadelphia, PA 19103
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 979-8370
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class: which registered:
Common Stock, par value $.001 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.|X|
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act)
YES |X| NO |_|
The aggregate market value of the Registrant's common stock held by
non-affiliates of the Registrant as of June 30, 2004 was $84,432,579 based upon
the closing sale price of the Registrant's common stock on the American Stock
Exchange of $2.14 on such date. See Footnote (1) below.
The number of shares outstanding of the Registrant's common stock as of
February 28, 2005 was 43,591,952.
Documents Incorporated by Reference: None
Index to Exhibits appears at page 57 of this Report
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(1) The information provided shall in no way be construed as an admission that
any person whose holdings are excluded from the figure is an affiliate or
that any person whose holdings are included is not an affiliate and any
such admission is hereby disclaimed. The information provided is solely
for record keeping purposes of the Securities and Exchange Commission.
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STONEPATH GROUP, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2004
TABLE OF CONTENTS
PART I
Item 1. Business....................................................................................1
Item 2. Properties.................................................................................16
Item 3. Legal Proceedings..........................................................................17
Item 4. Submission Of Matters To A Vote Of Security Holders........................................18
PART II
Item 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.............................................................18
Item 6. Selected Financial Data....................................................................19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................38
Item 8. Financial Statements and Supplementary Data................................................38
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......38
Item 9A. Controls and Procedures....................................................................38
Item 9B. Other Information..........................................................................43
PART III
Item 10. Directors and Executive Officers of the Registrant.........................................43
Item 11. Executive Compensation.....................................................................46
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters....................................................................................54
Item 13. Certain Relationships and Related Transactions.............................................55
Item 14. Principal Accountant Fees and Services ....................................................56
PART IV
Item 15. Exhibits and Financial Statement Schedules ................................................57
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PART I
This Annual Report on Form 10-K includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. We have based
these forward-looking statements on our current expectations and projections
about future events. These forward-looking statements are subject to known and
unknown risks, uncertainties and assumptions about us and our subsidiaries that
may cause our actual results, levels of activity, performance or achievements to
be materially different from any future results, levels of activity, performance
or achievements expressed or implied by such forward-looking statements. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "could," "would," "expect," "plan," "anticipate," "believe,"
"estimate," "continue" or the negative of such terms or other similar
expressions. Factors that might cause or contribute to such a material
difference include, but are not limited to, those discussed elsewhere in this
Annual Report, including the section entitled "Risks Particular to Our Business"
and the risks discussed in our other Securities and Exchange Commission filings.
The following discussion should be read in conjunction with our audited
consolidated financial statements and related notes thereto included elsewhere
in this report.
Item 1. Business
Overview
We are a non-asset-based third-party logistics services company providing
supply chain solutions on a global basis. We offer a full range of time-definite
transportation and distribution solutions through our Domestic Services platform
which manages and arranges the movement of raw materials, supplies, components
and finished goods for our customers. These services are offered through our
domestic air and ground freight forwarding business. We also offer a full range
of international logistics services including international air and ocean
transportation as well as customs house brokerage services through our
International Services platform. In addition to these core services, we provide
a broad range of value-added supply chain management services, including
warehousing, order fulfillment and inventory management solutions. We serve a
customer base of manufacturers, distributors and national retail chains through
a network of offices in 24 major metropolitan areas in North America and Puerto
Rico, 13 locations in the Asia Pacific region and 6 locations in Brazil, as well
as an extensive network of independent carriers and service partners
strategically located throughout the world.
Our objective is to build a leading global logistics services organization
that integrates established logistics companies with innovative technologies. To
that end, we are extending our network through a combination of synergistic
acquisitions and the organic expansion of our existing operations.
Our acquisition strategy focuses on acquiring and integrating logistics
businesses that will enhance operations within our current market areas as well
as extend our network to targeted locations in Asia, South America, Europe and
the Middle East. We select acquisition targets based upon their ability to
demonstrate: (1) historic levels of profitability; (2) a proven record of
delivering superior time-definite distribution and other value-added services;
(3) an established customer base of large and mid-sized companies; and (4)
opportunities for significant growth within strategic segments of our business.
As we integrate these companies, we intend to create additional
stockholder value by: (1) improving productivity by adopting enhanced
technologies and business processes; (2) improving transportation margins by
leveraging our growing purchasing power; (3) enhancing the opportunity for
organic growth by cross-selling and offering expanded services; and (4)
implementing standard management reporting systems.
Our strategy is designed to take advantage of shifting market dynamics.
The third-party logistics industry continues to grow as an increasing number of
businesses outsource their logistics functions to more cost effectively manage
and extract value from their supply chains. Also, we believe the industry is
positioned for further consolidation since it remains highly fragmented, and
since customers are demanding the types of sophisticated and broad reaching
services that can more effectively be handled by larger and more diverse
organizations.
We have completed the acquisition of 16 logistics companies. The initial
phase of our acquisition strategy was to develop a U.S.-based platform of
service offerings. We accomplished this through the acquisition of M.G.R.,
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Inc. (d/b/a "Air Plus") on October 5, 2001 and Global Transportation Services,
Inc. and its wholly-owned subsidiary Global Container Line, Inc. (collectively
"Stonepath Logistics International Services, Inc." or "SLIS") on April 4, 2002.
Founded in 1990, Air Plus is a leading time-definite logistics company providing
a full range of domestic transportation and distribution solutions including
warehousing and order fulfillment. Air Plus services a customer base of
manufacturers, distributors and national retail chains through its network of
offices in North America and an extensive network of over 200 agents. Founded in
1985, SLIS provides a full range of international transportation and logistics
solutions to a customer base of manufacturers and national retail chains. SLIS
also provides customs brokerage, ocean forwarding, NVOCC services, consolidation
and deconsolidation services, air import and export services and warehousing and
distribution services.
The next phase of our acquisition strategy was to supplement the organic
growth of our organization through targeted "add-on" acquisitions that were
intended to fill a strategic industry niche and offer complementary services to
our existing customer base. We accomplished this by acquiring United American
Acquisitions and Management, Inc. d/b/a United American Freight Services, Inc.
("United American") on May 30, 2002, Transport Specialists, Inc. ("TSI") on
October 1, 2002, Transportation Rail Warehousing Logistics, Inc. ("TRWL") on
January 31, 2003, Regroup Express LLC ("Regroup") on June 20, 2003 and Customs
Services International, Inc. ("CSI") on July 16, 2003. United American, based in
the Detroit, Michigan area, provides us with a division that supports the
automotive industry, while both TSI and Regroup, based in Northern Virginia, and
TRWL, based in Portland, Maine, service government agencies and the defense
sector. CSI provides a full range of international freight forwarding and
customs brokerage services out of its offices in Miami, Florida and El Paso,
Texas, with a focus on Latin America, Europe and Asia.
In 2003 and 2004, we completed a series of acquisitions that increased our
presence in Asia with the goal of building Stonepath into a leading worldwide
integrated logistics service organization. On August 8, 2003, we acquired a
controlling interest in the Singapore and Cambodia based operations of the
G-Link Group of companies, a regional logistics business headquartered in
Singapore, with offices throughout Southeast Asia. We then acquired three
Malaysian-based offices of G-Link in December 2003. During December 2003, we
also acquired controlling interests in East Ocean Logistics Ltd., a Hong
Kong-based company that specializes in international ocean freight services,
Planet Logistics Pte. Ltd., a Singapore-based company that focuses on
international and intra-Asia air cargo services, and Group Logistics Pte. Ltd.,
a start-up providing air cargo services in Shanghai, PRC. On February 9, 2004,
we increased our presence in Shanghai by acquiring a majority interest in
Shaanxi Sunshine Cargo Services International Company, Ltd. ("Shaanxi"), a Class
A licensed freight forwarder headquartered in Shanghai that has been operated by
founder and President Andy Tsai since 1993. Shaanxi provides a wide range of
customized transportation and logistics services and supply chain solutions,
including global freight forwarding, warehousing and distribution services,
shipping services and special freight handling.
As a result of an amendment to our domestic credit facility with LaSalle
Business Credit, LLC in November 2004, we are presently precluded from making
any acquisitions. However, we are seeking to replace that credit facility with
one that will permit us to resume our acquisition program. However, if and when
our acquisition program is resumed, we do not expect it to continue at its
historic pace because of our desire to optimize our existing footprints of
offices and services.
There are a variety of risks associated with our ability to achieve our
strategic objectives, including our ability to replace our current domestic
credit, our ability to obtain additional capital, our ability to achieve
profitability, our ability to acquire and profitably manage additional
businesses, our current reliance on a small number of key customers, the risks
inherent in international operations, and the intense competition in our
industry for customers and for the acquisition of additional businesses. For a
more detailed discussion of these risks, see the section of this Item 1 entitled
"Risks Particular to our Business."
Industry Overview
Businesses are increasingly focused on identifying ways to more
efficiently manage their supply chains - an operational necessity as products
are sourced and distributed globally, and a financial requirement as
organizations have discovered the fiscal benefits of streamlining their
logistics processes - providing an increased demand and opportunity for freight
transportation and logistics providers. Companies increasingly strive to
minimize inventory levels, reduce order and cash-to-cash cycle lengths, perform
manufacturing and assembly operations in lowest cost locations and distribute
their products throughout global markets, often requiring expedited or
time-definite shipment services. Furthermore, customers increasingly cite an
efficient supply chain as a critical
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element in improving their financial performance. To remain competitive,
successful companies need to not only achieve success in their core businesses,
they must execute quickly and accurately.
To accomplish their goals, businesses turn to organizations providing a
broad array of transportation supply chain services. These service providers
consist of freight forwarders, customs brokers, warehouse operators and other
value-added logistics service providers. They also have the option of utilizing
asset-based providers who offer their services primarily through their own
fleets of trucks, aircraft and vessels.
We believe that non-asset-based carriers are able to serve customers less
expensively and with greater flexibility than asset-based providers because they
select from various transportation options in routing customer shipments. To be
competitive, these non-asset-based service providers must possess experienced
and talented personnel armed with state-of-the-art technology and the ability to
provide global supply chain management services to be responsive to the
marketplace. Many logistics providers are now providing their customers with
customized solutions for the planning and management of complex supply chains.
The demand for these solutions has risen as companies continue to outsource
non-core competencies, globally source goods and materials and focus on managing
the overall cost of their supply chain. These trends are further facilitated by
the rapid growth of technology including the growth of Web-based track and trace
technology, and the ability to create electronic interfaces between the systems
of service providers and their customers.
We believe we can differentiate ourselves by focusing on time-definite
supply chain solutions with capabilities across virtually every mode of
transportation, as well as combining these services with other value-added
logistics services, including pick-and-pack services, merge-in-transit,
inventory control, Web-based order management, warehousing and reverse logistics
solutions. We also believe that we have a competitive advantage resulting from
our extensive knowledge of logistics markets, information systems, the
experience of our logistics managers and the market information we possess from
our diverse customer base.
We believe that the third-party logistics industry in general, and that
time-definite distribution in particular, is poised for continued growth. The
growth in the use of third-party logistics services is being driven by a number
of factors, including:
o Outsourcing of Non-Core Activities. Companies are increasingly
outsourcing freight forwarding, warehousing and other supply chain
activities to allow them to focus on their core competencies. From
managing purchase orders to the timely delivery of products,
companies turn to third-party logistics providers ("3PLs") to manage
these functions at a lower cost and more efficiently.
o Globalization of Trade. As barriers to international trade are
reduced or eliminated, companies are increasingly sourcing their
parts, supplies and raw materials from the most cost competitive
suppliers throughout the world. This places a greater emphasis on
international freight management and just-in-time delivery
capabilities. Outsourcing of manufacturing functions to, or locating
company-owned manufacturing facilities in, low cost areas of the
world also results in increased volumes of world trade.
o Increased Need for Time-Definite Delivery. The need for just-in-time
and other time-definite delivery has increased as a result of the
globalization of manufacturing, greater implementation of
demand-driven supply chains, the shortening of product cycles and
the increasing value of individual shipments. Many businesses
recognize that increased spending on time-definite supply chain
management services can decrease overall manufacturing and
distribution costs, reduce capital requirements, allow them to
manage their working capital more efficiently by reducing inventory
levels and inventory loss and improve service to their customers.
o Consolidation of Logistics Function. As companies try to develop
"partnering" relationships with fewer suppliers, they are reducing
the number of freight forwarders and supply chain management
providers they use. This trend places greater pressure on regional
or local freight forwarders and supply chain management providers to
grow or become aligned with a global network. Larger freight
forwarders and supply chain management providers benefit from
economies of scale which enable them to negotiate reduced
transportation rates with the carriers actually providing the
transportation services, improve their mix of cargo to achieve
desired densities and to allocate their overhead over a larger
volume of transactions. Globally-integrated freight forwarders and
supply chain management
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providers are better situated to provide a full complement of
services, including pick-up and delivery, shipment via air, sea
and/or ground transport, warehousing and distribution, and customs
brokerage.
o Increased Significance of Technology. Advances in technology are
placing a premium on decreased transaction times and increased
business-to-business activity. Companies have recognized the
benefits of being able to transact business electronically.
Accordingly, businesses increasingly are seeking the assistance of
supply chain service providers with sophisticated information
technology systems which facilitate real-time transaction processing
and Web-based shipment monitoring.
The growing emphasis on just-in-time inventory control processes has added
to the complexity and need for time-definite and other value-added supply-chain
services. We believe that we can continue to differentiate ourselves by
combining our time-definite transportation solutions with other complementary
supply chain solutions. We expect to benefit from the intense corporate focus on
lower-cost services, which will positively impact those providers who have the
ability to leverage relationships with numerous carriers and shippers. We also
believe that we are well positioned to take advantage of the growing trend
toward international freight services and time-definite domestic ground
services, both of which have increased in demand during the most recent economic
cycle.
Our Strategic Objectives
Our Business Strategy
Our objective is to provide customers with comprehensive value-added
logistics solutions on a global scale. We plan to achieve this goal through a
combination of growth through acquisition and continued organic growth. We
intend to carry out the following strategies:
o Enter New and Expand Existing Markets through Acquisitions. We
intend to pursue additional acquisitions, although at a far slower
pace than we have in the past, to enhance our position in our
current markets and to acquire operations in new markets. We
anticipate expanding into new and existing markets by acquiring
well-established logistics organizations that are leaders in their
regional markets. In particular, we intend to focus our acquisition
strategy on candidates that have historic levels of profitability, a
proven record of delivering superior time-definite distribution and
other value-added services, an established customer base of large
and mid-sized companies and opportunities for significant growth
within strategic segments of our business.
o Continue Organic Growth. A key component of our strategy is to
continue the organic growth of our existing business as well as the
business of the companies we intend to acquire. We expect that we
can continue to fuel internal growth by cross-selling our domestic
and international capabilities to our existing customer base and
deploying supply chain technologies that will drive new customer
acquisitions. As our organization grows and matures, we are able to
share opportunities throughout our organization and increase joint
selling efforts. We share our experiences and personnel throughout
the organization to enhance local expertise and optimize our
organization's capabilities. We believe these activities will
increase our network's growth well beyond the growth available to
each of our businesses on a stand-alone basis.
Our Acquisition Strategy
We believe there are many attractive acquisition candidates in our
industry because of the highly fragmented composition of the marketplace, the
industry participants' need for capital and their owners' desire for liquidity.
We plan to continue to expand our Domestic and International Services
platforms in the United States through "add-on" acquisitions of other companies
with complementary geographical and logistics service offerings. These "add-on"
acquisitions are generally expected to have pre-tax operating earnings of $1.0
million to $3.0 million. Companies in this range of earnings may be receptive to
our acquisition program since they are often too small to be identified as
acquisition targets by larger public companies or to independently attempt their
own public offerings. In addition, we intend to continue to pursue "platform"
acquisitions to expand in targeted markets in Asia, South America, Europe and
the Middle East which will further enable our global supply-chain service
capabilities
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and improve our overall profitability. We believe that our combined domestic and
international capabilities will provide a significant competitive advantage in
the marketplace.
A "platform" acquisition is defined by us as one that creates a
significant new capability for the Company, or entry into a new global
geography. When completing a platform acquisition, we would expect to retain the
management as well as the operating, sales and technical personnel of the
acquired company to maintain continuity of operations and customer service. The
objective would be to increase an acquired company's revenue and improve its
profitability by implementing our operating strategies for internal growth,
internal controls and management controls.
An "add-on" acquisition, on the other hand, will more likely be regional
in nature, will be smaller than a platform acquisition and will enable us to
offer additional services or expand into new regional markets, or serve new
industries. When justified by the size and service offerings of an add-on
acquisition, we expect to retain the management, along with the operating, sales
and technical personnel of the acquired company, while seeking to improve that
company's profitability by implementing our operating strategies, internal
controls and management controls. In most instances where there is overlap of
geographic coverage, operations acquired by add-on acquisitions will be
integrated into our existing operations in that market, resulting in the
elimination of duplicative overhead and operating costs.
If we are able to replace our current domestic credit facility with one
that permits additional acquisitions, we should be well positioned to
successfully pursue our acquisition strategy due to: (i) the highly fragmented
composition of the market; (ii) our strategy for creating an organization with
global reach, which should enhance an acquired company's ability to compete in
its local and regional market through an expansion of offered services and lower
operating costs; (iii) the potential for increased profitability as a result of
our centralization of certain administrative functions, greater purchasing
power, and economies of scale; (iv) our standing as a public corporation; (v)
our management strategy and controls, which should, in most cases, enable the
acquired company's management to remain involved in the operation of the
business; and (vi) the ability of our experienced management to identify
acquisition opportunities.
Our Operating Strategy
o Foster a Disciplined Entrepreneurial Environment. A key element of
our operating strategy is to foster a disciplined environment while
maintaining an entrepreneurial culture for our employees. We intend
to foster this environment by continuing to build on the names,
reputations and customer relationships of acquired companies. We are
also implementing a global management reporting and control system
requiring each business to implement Company-wide controls, policies
and management accountabilities. A disciplined entrepreneurial
business atmosphere should allow our regional offices to quickly and
creatively respond to local market demands and enhance our ability
to motivate, attract and retain managers to maximize growth and
profitability.
o Develop and Maintain Strong Customer Relationships. We seek to
develop and maintain strong, interactive customer relationships by
anticipating and focusing on our customers' needs. We emphasize a
relationship-oriented approach to business, rather than a commodity
or assignment-oriented approach used by many of our competitors. To
develop close customer relationships, we regularly meet with
existing and prospective customers to help design and execute
solutions for their supply chain strategies. We believe that this
relationship-oriented approach results in greater customer
satisfaction and reduced business development expense.
o Centralize Administrative Functions. We seek to maximize our
operational efficiencies by integrating general and administrative
functions at the corporate level, thereby reducing or eliminating
redundant functions and facilities at acquired companies. This
enables us to quickly realize potential savings and synergies,
efficiently control and monitor our operations and allows acquired
companies to focus on growing their sales and operations.
o Enhance Our Capital Structure. As we approach the next stage of our
development, we need to augment our capital structure by replacing
our domestic credit facility and by obtaining additional capital
from other sources. This may take the form of subordinated debt,
convertible preferred stock and common stock, among others. Such an
enhanced capital structure will permit continued
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expansion, but at a far slower past than we have in the past. This
growth will expand our services in existing markets and expand our
global reach.
Operations
Our primary business operations involve obtaining shipment or material
orders from customers, creating and delivering a wide range of logistics
solutions to meet customers' specific requirements for transportation and
related services, and arranging and monitoring all aspects of material flow
activity utilizing advanced information technology systems. These logistics
solutions include domestic and international freight forwarding, customs
brokerage and door-to-door delivery services using a wide range of
transportation modes, including air, ocean and truck as well as customs
brokerage, warehousing and other value-added services, such as inventory
control, assembly, distribution and installation for manufacturers and retailers
of commercial and consumer products.
As a non-asset-based logistics provider, we arrange for and subcontract
services on a non-committed basis to airlines, motor carriers, express
companies, steamship lines and warehousing and distribution operators. By
concentrating on network-based solutions, we avoid competition with logistics
providers that offer dedicated outsourcing solutions for single elements of the
supply chain. Such dedicated logistics companies typically provide expensive,
customized infrastructure and systems for a customer's specific application and,
as a result, dedicated solutions that are generally asset-intensive, inflexible
and invariably localized to address only one or two steps in the supply chain.
Our network-based services leverage common infrastructure and technology systems
so that solutions are scalable, replicable and require a minimum amount of
customization (typically only at the interface with the customer). This
non-asset ownership approach maximizes our flexibility in creating and
delivering a wide range of end-to-end logistics solutions on a global basis
while simultaneously allowing us to exercise significant control over the
quality and cost of the transportation services provided.
Within the logistics industry, we target specific markets in which we
believe we can achieve a competitive advantage and/or which are growing rapidly.
For example, in the freight forwarding market, we arrange for the transportation
of cargo that is generally larger and more complex than shipments handled by
integrated carriers such as United Parcel Service, Inc. and FedEx Corporation.
In addition, we provide specialized combinations of services that traditional
freight forwarders cannot cost-effectively provide, including time-definite
delivery requirements, direct-to-store distribution and merge-in-transit
movement of products from various vendors in a single coordinated delivery to,
and/or installation at, the end-user.
Our services are broadly classified into the following categories:
o Freight Forwarding Services. We offer domestic and international
air, ocean and ground freight forwarding for shipments that require
special handling or are generally larger than shipments handled by
integrated carriers of primarily small parcels such as United Parcel
Service, Inc. and FedEx Corporation. Our basic freight forwarding
business is complemented by customized and information
technology-based options to meet customers' specific needs. Our
Domestic Services organization offers same day, one, two and three
to five day service along with expedited ground service within North
America and Puerto Rico through our network of asset-based carriers.
On a limited basis, we also provide motor carrier services through
one of our own affiliates. Internationally we offer a wide range of
services from expedited air to multi-modal options through our
network of owned or agent offices throughout the world. In a few
markets in Asia, the Company offers co-loading services to the
freight forwarding marketplace.
o Customs Brokerage Services. Our International Services organization
provides customs brokerage services. Within each country, the rules
and regulations vary along with the level of expertise that is
required to perform the customs brokerage services. Our customs
brokers and support staff have substantial knowledge of the complex
tariff laws and customs regulations governing the payment of duty
and taxes, as well as valuation and import restrictions in their
respective countries.
o Warehousing and Other Value-added Services. Our warehousing services
primarily relate to storing goods and materials to meet our
customers' production or distribution schedules. Other value-added
services include receiving, deconsolidation and decontainerization,
sorting, put away, consolidation, assembly, inspection services,
cargo loading and unloading, assembly of freight, customer inventory
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control and protective packing and storage, order processing and
customer-directed invoicing. We receive storage charges for use of
our warehouses and fees for our other services.
o Time-Definite Transportation. We specialize in complex,
time-definite delivery of product to many destinations around the
world and all North American destinations. These include
high-volume, complex multi-destination consolidation programs for
catalog, retail and other shippers. We have special programs focused
on high value and breakable freight utilizing all modes of
transportation.
Other value-added services provided by us include:
o Direct-to-store logistics for retail customers involving
coordination of product received directly from manufacturers and
dividing large shipments from manufacturers into numerous smaller
shipments for delivery directly to retail outlets or distribution
centers to meet time-definite product launch dates.
o Turn-key product management services for retailers - including
comprehensive vendor compliance management, central delivery and
distribution centers close to consumption, inventory forecasting,
replenishment and management - all on the Web.
o Merge-in-transit logistics involving movement of products from
various vendors at multiple locations to a Company facility and the
subsequent merger of the various deliveries into a single
coordinated delivery to the final destination. Such services are
useful to retailers where deliveries from diverse sources are
organized and distributed to maximize efficiency of their sales and
marketing programs.
o Web-based fulfillment solutions providing order management as well
as the subsequent pick, pack and shipment for our customers.
o Turn-key supply chain and logistics outsourcing projects where we
operate one or more warehouses or the entire end-to-end supply
chain. We provide sophisticated systems that supply global location,
status and ownership of parts/SKUs and enable the timely cross
border customs clearance and placement desired by the final consumer
of the goods.
o Value-added, high-speed, time-definite, total-destination programs
that include packaging, transportation, unpacking and placement of
new products and equipment.
o Packaging, transportation, unpacking and stand installation for
domestic trade shows and major expositions.
o Reverse logistics involving the return of products from end users to
manufacturers, retailers, resellers or remanufacturers, including
verification of working order, defect analysis, serial number
tracking and inventory management.
Information Systems
A key component of our growth strategy is the regular enhancement of our
information systems and ultimate migration of the information systems of our
acquired companies to a common set of back-office and customer facing
applications. We believe that the ability to provide accurate, real-time
information on the status of shipments and the status, ownership and details of
the accompanying inventory is paramount to our customers. We believe that our
efforts in this area will provide competitive service advantages, new customers
and an increase of business from existing accounts. In addition, we believe that
centralizing our back-office operations and using our transportation management
system to automate the rating, routing, tender and financial settlement
processes for transportation movements will drive significant productivity
improvement across our network.
To execute this strategy, we have and will continue to assess technologies
obtained through our acquisition strategy in combination with commercially
available supply chain technologies to launch our own "best-of-breed" solution
set using a combination of owned and licensed technologies. We refer to this
technology set as Tech-Logis(TM) (or Technology in Logistics). We are developing
Tech-Logis(TM) to provide: (1) a customer-facing portal that unifies the look
and feel of how customers, employees and suppliers work with and connect to us;
(2) a robust
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supply chain operating system including order, inventory optimization,
transportation, warehouse and supply chain event management for use across the
organization; and (3) a common data repository for analysis and reporting to
provide advanced metrics to management and our customers. We have completed the
added value logistics portion of this integrated logistics and information
platform. We did encounter difficulty, however, with the functionality for the
multi-modal forwarding portion of the Tech-Logis(TM) platform in 2004. As a
result, the Company wrote off its investment in this unsuitable system in the
fourth quarter of 2004. The Company has redirected its efforts into a new
solution to meet its increasingly sophisticated needs for leading edge
technologies.
In executing this strategy, we have and will continue to invest
significant management and financial resources to deliver these technologies. We
believe these technologies will provide financial and competitive advantages in
the years ahead and will increase our competitive differentiation.
Consolidation of Businesses
We began to make changes in the fourth quarter of 2004 to further
consolidate our businesses and to improve our profitability. After a review of
our entire business, we made a number of targeted reductions across our employee
base. We also streamlined our line-haul trucking division, a strategic step to
ensure that our core focus remains on providing non-asset-based logistics
solutions to our clients. We also plan to move our corporate headquarters to
Seattle, Washington in the first half of 2005, in an effort to derive synergies
from the integration of the Company's corporate team with its U.S. operating
companies' support staff.
Sales and Marketing
We market services on a global basis using our senior management, sales
executives, regional managers, terminal managers and our national service
centers located strategically across the United States and in select
international locations.
We seek to create long-term relationships with our customers and to
increase the quantity and diversity of business from each customer over time. We
also emphasize obtaining high-revenue national accounts with multiple shipping
locations. These accounts typically impose numerous requirements on those
competing for their freight business, including electronic data interchange and
proof of delivery capabilities, the ability to track shipments, the ability to
generate customized shipping reports and a nationwide network of terminals.
These requirements often limit the competition for these accounts to a very
small number of logistics providers, enabling us to more effectively compete for
these accounts.
Our customers include large manufacturers and distributors of computers
and other electronic and high-technology equipment, printed and publishing
materials, automotive and aerospace components, trade show exhibit materials,
telecommunications equipment, machinery and machine parts, apparel,
entertainment products and household goods. For the year ended December 31,
2004, our largest customer, Best Buy Co., Inc., accounted for approximately 13%
of our revenue. In 2003, Best Buy represented 24% of our revenue. The change was
principally due to the Company's organic and acquired growth. In March 2005, the
Company entered into a new three-year contract with Best Buy providing for an
expansion of its existing expedited transportation and logistics services.
Approximately 16% of our 2004 revenue was derived from our next five largest
customers, none of which accounted for 10% or more of our 2004 revenue. As our
current operations continue to diversify, and as we continue our acquisition
strategy, our exposure to customer and industry concentrations should be
significantly reduced.
Competition and Business Conditions
Our business is directly impacted by the volume of domestic and
international trade. The volume of this trade is influenced by many factors,
including economic and political conditions in the United States and abroad,
major work stoppages, exchange controls, currency fluctuations, acts of war,
terrorism and other armed conflicts, and United States and international laws
relating to tariffs, trade restrictions, foreign investments and taxation.
The global logistics services and transportation industries are
intensively competitive and are expected to remain so for the foreseeable
future. We compete against other integrated logistics companies, as well as
transportation services companies, consultants, information technology vendors
and shippers' transportation
8
departments. This competition is based primarily on capabilities, rates, quality
of service (such as damage-free shipments, on-time delivery and consistent
transit times), reliable pickup and delivery and scope of operations.
As a provider of third-party logistics services, we encounter competition
from a large number of firms, much of it coming from local or regional firms
which have only one or a small number of offices and do not offer the breadth of
services and integrated approach that we offer. However, some of this
competition comes from major United States and foreign-owned firms which have
networks of offices and offer a wide variety of services. We believe that
quality of service, including information systems capability, global network
capacity, reliability, responsiveness, expertise, convenience, scope of
operations, customized program design and implementation and price are important
competitive factors in our industry.
Competition within the domestic freight forwarding industry is also
intense. Although the industry is highly fragmented with a large number of
participants, we compete most often with a relatively small number of freight
forwarders with nationwide networks and the capability to provide the breadth of
services offered by us. We also encounter competition from passenger and cargo
air carriers, trucking companies and others. As we expand our international
operations, we expect to encounter increased competition from those freight
forwarders that have a predominantly international focus, including DHL Danzas
Air and Ocean, Expeditors International of Washington, Inc., UPS Supply Chain
Solutions (a unit of United Parcel Service, Inc.), UTi Worldwide, Inc. and Eagle
Logistics, Inc. Many of our competitors have substantially greater financial
resources than we do.
We also encounter competition from regional and local air freight
forwarders, cargo sales agents and brokers, surface freight forwarders and
carriers and associations of shippers organized for the purpose of consolidating
their members' shipments to obtain lower freight rates from carriers. As an
ocean freight forwarder, we encounter strong competition in every country in
which we choose to operate. This includes competition from steamship companies
and both large forwarders with multiple offices and local and regional
forwarders with one or a small number of offices. Quality of service, including
reliability, responsiveness, expertise and convenience, scope of operations,
information technology and price are the most important competitive factors in
our industry.
Regulation
We do not believe that transportation related regulatory compliance has
had a material adverse impact on operations to date. However, failure to comply
with the applicable regulations or to maintain required permits or licenses
could result in substantial fines or revocation of our operating permits or
authorities. We cannot give assurance as to the degree or cost of future
regulations on our business. Some of the regulations affecting our operations
are described below.
Our air freight forwarding business is subject to regulation, as an
indirect air cargo carrier, under the U.S. Department of Transportation's
Transportation Security Administration. The airfreight forwarding industry is
subject to regulatory and legislative changes that can affect the economics of
the industry by requiring changes in operating practices or influencing the
demand for, and the costs of providing, services to customers.
Our surface freight forwarding operations are subject to various federal
statutes and are regulated by the Surface Transportation Board. This federal
agency has broad investigatory and regulatory powers, including the power to
issue a certificate of authority or license to engage in the business, to
approve specified mergers, consolidations and acquisitions, and to regulate the
delivery of some types of domestic shipments and operations within particular
geographic areas. The Surface Transportation Board and U.S. Department of
Transportation also have the authority to regulate interstate motor carrier
operations, including the regulation of certain rates, charges and accounting
systems, to require periodic financial reporting, and to regulate insurance,
driver qualifications, operation of motor vehicles, parts and accessories for
motor vehicle equipment, hours of service of drivers, inspection, repair,
maintenance standards and other safety related matters. The federal laws
governing interstate motor carriers have both direct and indirect application to
the Company. The breadth and scope of the federal regulations may affect our
operations and the motor carriers we use to provide transportation services. In
certain locations, state or local permits or registrations may also be required
to provide or obtain intrastate motor carrier services for the Company. Our
property brokerage operations similarly subject us to various federal statutes
and regulation as a property broker by the Surface Transportation Board, and we
have obtained a property broker license and posted a surety bond as required by
federal law. Our international operations are subject to regulation by the
Federal Maritime Commission, or FMC, as it regulates and licenses ocean
forwarding operations. Indirect ocean carriers (non-vessel operating common
carriers) are subject to FMC regulation, under the FMC tariff filing and
9
surety bond requirements, and under the Shipping Act of 1984, particularly those
terms proscribing rebating practices.
Our customs brokerage operations are subject to the licensing requirements
of the U.S. Treasury and are regulated by the U.S. Customs Service. Foreign
customs brokerage operations are also licensed in and subject to the regulations
of their respective countries.
In the United States, we are also subject to federal, state and local
provisions relating to the discharge of materials into the environment or
otherwise for the protection of the environment. Similar laws apply in many
foreign jurisdictions in which we operate or may operate in the future. Although
current operations have not been significantly affected by compliance with these
environmental laws, governments are becoming increasingly sensitive to
environmental issues, and we cannot predict what impact future environmental
regulations may have on our business. We do not anticipate making any material
capital expenditures for environmental control purposes.
Personnel
At December 31, 2004, we had 1,169 employees of which 866 employees were
engaged in operations, 86 in sales and marketing, and 217 in finance,
administration and management functions.
None of our employees are covered by a collective bargaining agreement,
and we believe that we have a good relationship with our employees.
Discontinued Operations
Prior to the first quarter of 2001, our principal business was developing
early-stage technology businesses with significant Internet features and
applications. Largely as a result of the significant correction in the global
stock markets which began during 2000, and the corresponding decrease in the
valuation of technology businesses and contraction in the availability of
venture financing, we changed our business strategy to focus on the acquisition
of operating businesses within a particular industry segment.
After having evaluated a number of different industries, during the second
quarter of 2001 we focused our acquisition efforts specifically on the
transportation and logistics industry as it:
o demonstrated significant growth characteristics as an increasing
number of businesses outsource their supply-chain management in
order to achieve cost-effective logistics solutions;
o is positioned for further consolidation as many sectors of the
industry remain fragmented; and
o is capable of achieving enhanced efficiencies through the adoption
of e-commerce and other technologies.
This decision occurred in conjunction with our June 21, 2001 appointment
of Dennis L. Pelino as our Chairman and Chief Executive Officer. Prior to
joining Stonepath, Mr. Pelino had over 25 years of logistics experience,
including as President and Chief Operating Officer of Fritz Companies, Inc.,
where he was employed from 1987 to 1999.
To reflect the change in business model, our consolidated financial
statements have been presented in a manner in which the assets, liabilities,
results of operations and cash flows related to our former business have been
segregated from those of our continuing operations and are presented as
discontinued operations.
Corporate Information
Stonepath Group, Inc. was incorporated in Delaware in 1998. Our principal
executive offices are located at 1600 Market Street, Suite 1515, Philadelphia,
Pennsylvania. Our telephone number is (215) 979-8370 and our Internet website
address is www.stonepath.com. We make available free of charge on our website
all materials that we file with the Securities and Exchange Commission,
including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and amendments to these reports as soon as
reasonably practicable after such materials have been filed with, or furnished
to, the Securities and Exchange Commission.
10
Segment Information
For additional information about our business segments, see the business
segment information presented in Note 16 to the consolidated financial
statements.
Risks Particular to Our Business
o We have not been profitable in four out of the last five years.
We incurred net losses of $13,043,355 in 2004, $785,603 in 2003,
$17,459,092 in 2001, and $36,171,273 in 2000. Since the adoption of our new
business model of delivering non-asset based third-party logistics services in
2001, we have incurred losses from continuing operations of $13,018,355 in 2004
and $522,572 in 2003. Although our 2004 results include restructuring and excess
earn-out charges of $7,443,440, our ability to achieve profitability on a
continuing basis in the future is dependent upon (a) the results of the efforts
we began in the fourth quarter of 2004 to integrate our business operations, (b)
our ability to pass along added costs to customers, including escalating fuel
charges, (c) our ability to improve our buying of carrier services, (d) our
ability to implement a new freight forwarding information system, and (e) our
ability to retain and attract talented and experienced personnel in the future.
There is no assurance that those results will achieve their intended effect or
that we will be able to effectuate such actions.
o We are unable to make further acquisitions until we replace our existing
domestic credit facility.
An amendment to our credit facility with LaSalle Business Credit, LLC in
November 2004 prohibits us from making further acquisitions. Our ability to make
further acquisitions is dependent upon our ability to replace that credit
facility with a credit facility which permits us to make further acquisitions.
o If we are unable to profitably manage and integrate the companies we
acquire or are unable to acquire additional companies, we will not achieve our
growth and profit objectives.
Our goal is to build a global logistics services organization. Realizing
this goal will require the acquisition of a number of diverse companies in the
logistics industry covering a variety of geographic regions and specialized
service offerings. There can be no assurance that, if we are able to make
further acquisitions, we will be able to identify, acquire or profitably manage
additional businesses or successfully integrate any acquired businesses without
substantial costs, delays or other operational or financial problems. Further,
acquisitions involve a number of risks, including possible adverse effects on
our operating results, diversion of management resources, failure to retain key
personnel, and risks associated with unanticipated liabilities, some or all of
which could have a material adverse effect on our business, financial condition
and results of operations.
o Additional long-term and equity financing will be required to implement
our business strategy and meet our existing earn-out obligations.
We believe that additional capital will be required to execute our
strategy in the future as well as fund existing obligations from prior
acquisitions. We intend to obtain that additional capital through a combination
of debt and equity financing. There is no assurance that any such debt or equity
can be raised on a cost effective basis or within the timeframe necessary to
implement our strategy or to meet our existing obligations.
o Our domestic credit facility limits earn-out payments.
An amendment to our credit facility with LaSalle Business Credit, LLC in
November 2004 precludes the payment of future earn-out payments unless the
undrawn availability under the credit facility averages $2.5 million for the 60
days preceding the payment and will be at least $2.5 million after giving effect
to the payment. This limitation creates the possibility that earn-out payments
cannot be made when due which could result in a breach of our obligations to the
parties entitled to receive the earn-out payments, unless we are successful in
replacing the facility with one that permits such payments.
11
o Our domestic credit facility requires repayment on its expiration date
of May 31, 2006.
Our amended credit agreement expires on May 31, 2006. There is an absolute
need to replace this facility on or before the expiration date to resume our
acquisition strategy to grow through acquisitions and to provide sufficient
liquidity to continue to finance our existing and future working capital needs.
Our free cash flow, if any, through the expiration of this facility will be
insufficient in amount to repay this facility and finance our working capital
needs at the facility's expiration date. There is no assurance that we will be
able to replace this credit facility.
o Due to our acquisition strategy, our earnings will be adversely affected
by non-cash charges relating to the amortization of intangibles.
Under applicable accounting standards, purchasers are required to allocate
the total consideration paid in a business combination to the identified
acquired assets and liabilities based on their fair values at the time of
acquisition. The excess of the consideration paid in a business combination over
the fair value of the identifiable tangible assets acquired is to be allocated
among identifiable intangible assets and goodwill. The amount allocated to
goodwill is not subject to amortization. However, it is tested at least annually
for impairment. The amount allocated to identifiable intangibles, such as
customer relationships and the like, is amortized over the life of these
intangible assets. This subjects us to periodic charges against our earnings to
the extent of the amortization incurred for that period. Because our business
strategy focuses on growth through acquisitions, our future earnings will be
subject to greater non-cash amortization charges than a company whose earnings
are derived organically. As a result, we will experience an increase in non-cash
charges related to the amortization of intangible assets acquired in our
acquisitions. This will create the appearance, based on our consolidated
financial statements, that our intangible assets are diminishing in value, when
in fact they may be increasing because we are growing the value of our
intangible assets (e.g., customer relationships).
o Since we are not obligated to follow any particular criteria or
standards for acquisition candidates, shareholders must rely solely on our
ability to identify, evaluate and complete acquisitions.
Even though we have developed general acquisition guidelines, we are not
obligated to follow any particular operating, financial, geographic or other
criteria in evaluating candidates for potential acquisitions or business
combinations. We target companies, in growing markets, which we believe will
provide the best potential for long-term financial return for our shareholders
and we determine the purchase price and other terms and conditions of
acquisitions. Our shareholders will not have the opportunity to evaluate the
relevant economic, financial and other information that we will use and consider
in deciding whether or not to enter into a particular transaction.
o The scarcity of, and competition for, acquisition opportunities makes it
more difficult to complete acquisitions.
There are a limited number of operating companies available for
acquisition which we consider desirable. In addition, there is a high level of
competition to acquire these operating companies. A large number of established
and well-financed entities are active in acquiring the type of companies we
believe are desirable. Many of these entities have significantly greater
financial resources than we have. Consequently, we are at a competitive
disadvantage in negotiating and executing possible acquisitions of these
businesses. Even if we are able to successfully compete with these entities,
this competition may affect the terms of completed transactions and, as a
result, we may pay more than we expected for potential acquisitions. We may find
it difficult to identify operating companies that complement our strategy, and
even if we identify a company that complements our strategy, we may be unable to
complete an acquisition of such a company for many reasons, including:
- a failure to agree on the terms necessary for a transaction, such as
purchase price;
- incompatibility of operating strategies and management philosophies;
- competition from other acquirers of operating companies;
- insufficient capital to acquire a profitable logistics company; and
- the unwillingness of a potential acquiree to work with our
management or our affiliated companies.
12
We will not be able to successfully implement our business plan if we are
unable to successfully compete with other entities in acquiring the companies we
target.
o The issuance of additional securities may cause additional dilution to
the interests of our existing shareholders.
The additional financing required to fund our acquisition strategy and
other capital needs may require us to issue additional shares of common stock or
common stock equivalents to generate the required financing. The issuance of
such securities will further increase the number of shares outstanding and
further dilute the interests of our existing shareholders. We may issue more
shares of common stock for this purpose without prior notice to our
shareholders.
We may also issue securities to, among other things, facilitate a business
combination, acquire assets or stock of another business, compensate employees
or consultants or for other valid business reasons at the discretion of our
Board of Directors, which could further dilute the interests of our existing
shareholders.
o The exercise or conversion of our outstanding options, warrants or other
convertible securities or any derivative securities we issue in the future will
result in the dilution of our existing shareholders and may create downward
pressure on the trading price of our common stock.
We are currently authorized to issue 100,000,000 shares of common stock.
As of February 28, 2005, we had 43,591,952 outstanding shares of common stock.
We may in the future issue up to 13,330,435 additional shares of our common
stock upon conversion or exercise of existing outstanding convertible
securities, options and warrants in accordance with the following schedule:
Number of Shares Proceeds
---------------- ------------
Options outstanding under our stock option plan 10,757,451 $ 17,336,395
Non-plan options 615,200 2,026,750
Warrants 1,957,784 4,417,794
------------ ------------
Total 13,330,435 $ 23,780,939
============ ============
Even though the aggregate exercise of these securities could generate
material proceeds for us, the issuance of these additional shares of common
stock would result in the dilution of the ownership interests of our existing
common shareholders and the market price of our common stock could be adversely
affected.
o We rely on a small number of large customers, the loss of which would
have a negative effect on our results of operations.
Even though our customer base is diversifying as we grow, it remains
concentrated. For the year ended December 31, 2004 our largest customer, Best
Buy Co., Inc. ("Best Buy"), a national retail chain, accounted for approximately
13% of our total revenue. Our next five largest customers accounted for
approximately 16% of our total revenue, with none of these customers accounting
for 10% or more of our total revenue. We believe the risk posed by this
concentration is mitigated by our longstanding and continuing relationships with
these customers and we are confident that these relationships will remain
ongoing for the foreseeable future. In March 2005, the Company entered into a
new three-year contract with Best Buy. We intend to continue to provide superior
service to all of our customers and have no expectation that revenue from any of
these customers will be reduced as a result of any factors within our control.
However, adverse conditions in the industries of our customers could cause us to
lose a significant customer or experience a decrease in shipment volume. Either
of these events could negatively impact us. Our immediate plans, however, are to
reduce our dependence on any particular customer or customers by increasing our
sales and customer base by, among other things, diversifying our service
offerings and continuing with our growth strategy.
13
o The risks associated with international operations could adversely
affect our operations and ability to grow outside of the United States.
A significant portion of our revenue is derived from our international
operations and the growth of those operations is an important part of our
business strategy. Our current international operations are focused on the
shipment of goods into and out of the United States and are dependent on the
volume of international trade with the United States. Our strategic plan
contemplates the growth of those operations as well as expanding into the
transportation of goods wholly outside of the United States. The following
factors could adversely affect our current international operations as well as
the growth of those operations:
- the political and economic systems in certain international markets
are less stable than in the United States;
- wars, civil unrest, acts of terrorism and other conflicts exist in
certain international markets;
- export restrictions, tariffs, licenses and other trade barriers can
adversely affect the international trade serviced by our
international operations;
- managing distant operations with different local market conditions
and practices is more difficult than managing domestic operations;
- differing technology standards in other countries present
difficulties and incremental expense in integrating our services
across international markets;
- complex foreign laws and treaties can adversely affect our ability
to compete; and
- our ability to repatriate funds may be limited by tax ramifications
and foreign exchange controls.
o Terrorist attacks and other acts of violence or war may affect any
market on which our shares trade, the markets in which we operate, our
operations and our profitability.
Terrorist acts or acts of war or armed conflict could negatively affect
our operations in a number of ways. Any of these acts could result in increased
volatility in or damage to the United States and worldwide financial markets and
economy. Acts of terrorism or armed conflict, and the uncertainty caused by such
conflicts, could cause an overall reduction in worldwide sales of goods and
corresponding shipments of goods. This would have a negative effect on our
operations. Also, terrorist activities similar to the type experienced on
September 11, 2001 could result in another halt of trading of securities on the
American Stock Exchange, which could also have an adverse effect on the trading
price of our shares and overall market capitalization.
o We depend on the continued service of certain executive officers. We can
not assure you that we will be able to retain these persons.
For the foreseeable future, our success will depend largely on the
continued services of Dennis L. Pelino, our Chairman, Jason Totah, our Chief
Executive Officer and Robert Arovas, our President, because of their collective
industry knowledge, marketing skills and relationships with major vendors and
customers. We have employment agreements with each of these individuals which
contain a non-competition covenant which survives their actual term of
employment. Nevertheless, should any of these individuals leave the Company, it
could have a material adverse effect on our future results of operations.
o We face intense competition in our industry.
The freight forwarding, logistics and supply chain management industry is
intensely competitive and is expected to remain so for the foreseeable future.
We face competition from a number of companies, including many that have
significantly greater financial, technical and marketing resources. There are a
large number of companies competing in one or more segments of the industry,
although the number of firms with a global network that offer a full complement
of freight forwarding and supply chain management services is more limited.
Depending on the location of the customer and the scope of services requested,
we must compete against both the niche players and larger entities. In addition,
customers increasingly are turning to competitive bidding situations involving
bids from a number of competitors, including competitors that are larger than we
are.
14
o Our stock price may be volatile due to factors under, as well as out of,
our control.
The market price of our common stock has been highly volatile. Some
factors that may affect the market price in the future include:
- actual or anticipated fluctuations in our operating results;
- announcements of technological innovations or new commercial
products or services by us or our competitors;
- a continued weakening of general market conditions which in turn
could have a depressive effect on the volume of goods shipped and
shipments that we manage or arrange;
- acts of global terrorism or armed conflicts; and
- changes in recommendations or earnings estimates by securities
analysts.
Furthermore, the stock market has historically experienced volatility
which has particularly affected the market prices of securities of many
companies with a small market capitalization and which sometimes has been
unrelated to the operating performances of such companies.
o Our cash flow will be adversely affected in the future once we make use
of our consolidated net operating loss carryforward available to offset future
taxable income.
We have accumulated a net operating loss carryforward for federal income
tax purposes. As of December 31, 2004, approximately $47.0 million of these
losses were available to offset our taxable income until the losses are fully
utilized. Once these available losses have been utilized, our cash flows will be
affected accordingly. We do not anticipate paying federal income taxes in the
near future as we expect that our existing net operating loss carryforward
should be sufficient to offset any taxable income that is generated. However,
additional sales of our securities could have the effect of significantly
limiting our ability to utilize our existing net operating loss carryforward in
the future.
o If we fail to improve our management information and financial reporting
systems, we may experience an adverse effect on our operations and financial
condition.
Our management information and financial reporting systems need to be
improved. Failure to enhance these systems could delay our receipt of management
and financial information at the consolidated level which could disrupt our
operations or impair our ability to monitor our operations and have a negative
effect on our financial condition. We have completed our first assessment of the
Company's internal control over financial reporting as of December 31, 2004. In
making our assessment of internal control over financial reporting, management
used the criteria issued by the Committee of Sponsoring Organizations of the
Treadway Commission in "Internal Control-Integrated Framework." We have
concluded that our internal control over financial reporting was not effective
as of December 31, 2004 based on that criteria.
o Because we are a holding company, we depend on receiving distributions
from our subsidiaries and we could be harmed if such distributions could not be
made in the future.
We are a holding company and all of our operations are conducted through
subsidiaries. Consequently, we rely on dividends or advances from our
subsidiaries. The ability of our subsidiaries to pay dividends and our ability
to receive distributions from those subsidiaries are subject to applicable local
law and other restrictions including, but not limited to, applicable tax and
exchange control laws. Such laws and restrictions could limit the payment of
dividends and distributions to us which would restrict our ability to continue
operations.
o We believe our industry is consolidating and if we cannot gain
sufficient market presence, we may not be able to compete successfully against
larger global companies.
We believe the market trend within our industry is towards consolidation
of the niche players into larger companies which are attempting to increase
global operations through the acquisition of regional and local freight
15
forwarders. If we cannot gain sufficient market presence or otherwise establish
a successful strategy in our industry, we may not be able to compete
successfully against larger companies in our industry with global operations.
o We may be required to incur material expenses in defending or resolving
outstanding lawsuits which would adversely affect our results of operations.
We are a defendant in a number of legal proceedings, including those we
have identified as material in our periodic SEC filings. Although we believe
that the claims asserted in these proceedings are without merit, and we intend
to vigorously defend these matters, we could incur material expenses in the
defense and resolution of these matters. Since we have not established any
reserves in connection with these claims, any such liability would be recorded
as an expense in the period incurred or estimated. This amount, even if not
material to our overall financial condition, could adversely affect our results
of operations in the period recorded.
o We have a limited operating history upon which you can evaluate our
prospects.
During 2001, we discontinued our former business model of developing
early-stage technology businesses, and adopted a new model of delivering
non-asset-based third-party logistics services. The first acquisition under our
new business model occurred on October 5, 2001. Subsequent acquisitions were
completed during 2002, 2003 and 2004. As a result, we have a limited operating
history under our current business model. Even though we are managed by senior
executives with significant experience in the industry, our limited operating
history makes it difficult to predict the longer-term success of our business
model.
o Provisions of our charter and applicable Delaware law may make it more
difficult to complete a contested takeover of our company.
Certain provisions of our certificate of incorporation and the General
Corporation Law of the State of Delaware (the "GCL") could deter a change in our
management or render more difficult an attempt to obtain control of us, even if
such a proposal is favored by a majority of our shareholders. For example, we
are subject to the provisions of the GCL that prohibit a public Delaware
corporation from engaging in a broad range of business combinations with a
person who, together with affiliates and associates, owns 15% or more of the
corporation's outstanding voting shares (an "interested shareholder") for three
years after the person became an interested shareholder, unless the business
combination is approved in a prescribed manner. Finally, our certificate of
incorporation includes undesignated preferred stock, which may enable our Board
of Directors to discourage an attempt to obtain control of us by means of a
tender offer, proxy contest, merger or otherwise.
Item 2. Properties
The Company does not own any real estate and currently leases all of its
facilities.
Our corporate headquarters is located at 1600 Market Street, Suite 1515,
Philadelphia, Pennsylvania where we lease approximately 4,000 square feet of
office space.
As of February 28, 2005, we leased and maintained logistics facilities in
28 locations throughout the United States plus one in Puerto Rico as well as 19
international locations. The majority of these locations are operating terminals
that contain office space and warehouse or cross-dock facilities and range in
size from approximately 1,200 square feet to 160,000 square feet. A few of these
facilities are limited to a small sales and administrative office.
Lease terms for our principal properties are generally up to five years
and terminate at various times through 2010, while a few of the smaller
facilities are leased on a month-to-month basis. The Company believes that
current leases can be extended and that suitable alternative facilities are
available in the vicinity of existing facilities should extensions be
unavailable or undesirable at the end of the current lease arrangements.
16
Our facilities are situated in the following locations:
Philadelphia New York (2 locations)
Atlanta Orlando
Binghamton, NY Portland, ME
Boston Salt Lake City
Chicago (2 locations) San Francisco
Columbus Seattle
Dallas/Fort Worth St. Louis
Denver Washington, D.C
Detroit San Juan, Puerto Rico
El Paso Hong Kong
Houston PRC (6 locations)
Indianapolis Singapore (2 locations)
Los Angeles (2 locations) Malaysia (3 locations)
Miami Cambodia
Milwaukee Brazil (6 locations)
Minneapolis (2 locations)
Item 3. Legal Proceedings
The Company was named as a defendant in eight purported class action
complaints filed in the United States Court for the Eastern District of
Pennsylvania between September 24, 2004 and November 19, 2004. Also named as
defendants in these lawsuits were officers Dennis L. Pelino and Thomas L. Scully
and former officer Bohn H. Crain. These cases have now been consolidated for all
purposes in that Court under the caption In re Stonepath Group, Inc. Securities
Litigation, Civ. Action No. 04-4515 and the lead plaintiff, Globis Capital
Partners, LP, filed an amended complaint in February 2005. The lead plaintiff
seeks to represent a class of purchasers of the Company's shares between March
29, 2002 and September 20, 2004, and allege claims for securities fraud under
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. These claims
are based upon the allegation that certain public statements made during the
period from March 29, 2002 through September 20, 2004 were materially false and
misleading because they failed to disclose that the Company's Domestic Services
operations had improperly accounted for accrued purchased transportation costs.
The plaintiffs are seeking compensatory damages, attorneys' fees and costs, and
further relief as may be determined by the Court. The Company and the individual
defendants believe that the plaintiffs' claims are without merit and intend to
vigorously defend against them.
The Company has been named as a nominal defendant in a shareholder
derivative action on behalf of the Company that was filed on October 12, 2004 in
the United States District Court for the Eastern District of Pennsylvania under
the caption Ronald Jeffrey Neer v. Dennis L. Pelino, et al., Civ. A. No.
04-cv-4971. Also named as defendants in the action are all of the individuals
who were serving as directors of the Company when the complaint was filed
(Dennis L. Pelino, J. Douglas Coates, Robert McCord, David R. Jones, Aloysius T.
Lawn and John H. Springer), former directors Andrew Panzo, Lee C. Hansen, Darr
Aley, Stephen George, Michela O'Connor-Abrams and Frank Palma, officer Thomas L.
Scully and former officers Bohn H. Crain and Stephen M. Cohen. The derivative
action alleges breach of fiduciary duty, abuse of control, gross mismanagement,
waste of corporate assets, unjust enrichment and violations of the
Sarbanes-Oxley Act of 2002. These claims are based upon the allegation that the
defendants knew or should have known that the Company's public filings for
fiscal years 2001, 2002 and 2003 and for the first and second quarters of fiscal
year 2004, and certain press releases and public statements made during the
period from January 1, 2001 through August 9, 2004, were materially misleading.
The complaint alleges that the statements were materially misleading because
they understated the Company's accrued purchase transportation liability and
related costs of transportation in violation of generally accepted accounting
principles and they failed to disclose that the Company lacked internal
controls. The derivative action seeks compensatory damages in favor of the
Company, attorneys' fees and costs, and further relief as may be determined by
the Court. The defendants believe that this action is without merit, have filed
a motion to dismiss this action, and intend to vigorously defend themselves
against the claims raised in this action.
17
On October 22, 2004, Douglas Burke filed a two-count action against United
American Acquisitions and Management, Inc. ("UAF"), Stonepath Logistics Domestic
Services, Inc., and the Company in the Circuit Court for Wayne County, Michigan.
Mr. Burke is the former President and Chief Executive Officer of UAF. The
Company purchased the stock of UAF from Mr. Burke on May 30, 2002 pursuant to a
Stock Purchase Agreement. At the closing of the transaction Mr. Burke received
$5.1 million and received the right to receive an additional $11.0 million in
four annual installments based upon UAF's performance in accordance with the
Stock Purchase Agreement. Stonepath Logistics Domestic Services, Inc. and Mr.
Burke also entered into an Employment Agreement. Mr. Burke's complaint alleges
that the defendants breached the terms of the Employment Agreement and Stock
Purchase Agreement and seeks, among other things, the production of financial
information, unspecified damages, attorney's fees and interest. The defendants
believe that Mr. Burke's claims are without merit and intend to vigorously
defend against them.
By letter dated March 25, 2005, the court-appointed receiver (the
"Receiver") of Lancer Management Group, LLC and certain related parties asserted
that he has determined that payments made by Lancer Partners, L.P. totaling $3.0
million and payments made by related entities totaling $5.3 million were
avoidable as fraudulent transfers. Lancer Partners, L.P. and certain related
entities purchased securities of the Company in past private placement
transactions. The letter provides no basis for the Receiver's determination and
seeks evidence from the Company establishing that the payments are not avoidable
or the payment of $8.3 million. The Company is in the process of reviewing the
transactions identified in the Receiver's letter.
The Company is not able to predict the outcome of any of the foregoing
litigation at this time, since each action is in an early stage. An adverse
determination in any of those actions could have a material and adverse effect
on the Company's financial position, results of operations and/or cash flows.
The Company has received notice that the Securities and Exchange
Commission ("Commission") is conducting an informal inquiry to determine whether
certain provisions of the federal securities laws have been violated in
connection with the Company's accounting and financial reporting. As part of the
inquiry, the staff of the Commission has requested information relative to the
restatement amounts, personnel at the Air Plus subsidiary and Stonepath Group,
Inc. and additional background information for the period from October 5, 2001
to December 2, 2004. The Company is voluntarily cooperating with the staff.
Item 4. Submission Of Matters To A Vote Of Security Holders
None
PART II
Item 5. Market For Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Our common stock is traded on the American Stock Exchange under the symbol
"STG." The table below sets forth the high and low prices for our common stock
for the quarters included within 2004 and 2003.
High Low
Year ended December 31, 2004
First quarter $4.20 $2.27
Second quarter 4.05 1.80
Third quarter 2.10 0.86
Fourth quarter 1.28 0.60
Year ended December 31, 2003
First quarter 1.84 1.40
Second quarter 2.79 1.75
Third quarter 3.14 2.00
Fourth quarter 2.99 2.26
Share Information
As of February 28, 2005 there were 43,591,952 shares of our common stock
outstanding, owned by 233 registered holders of record. Management estimates
there are over 7,300 stockholders holding stock in nominee name. We have not
paid cash dividends on our common stock and do not anticipate or contemplate
paying cash dividends in the foreseeable future. We plan to retain any earnings
for use in the operations of our business and to fund our acquisition strategy.
Furthermore, we are limited in our ability to pay dividends under the terms of
our domestic credit facility.
18
Equity Compensation Plan Information
The following table sets forth information, as of December 31, 2004, with
respect to the Company's stock option plan under which common stock is
authorized for issuance, as well as other compensatory options granted outside
of the Company's stock option plan.
(a) (b) (c)
Number of
securities
remaining
available for
Number of future issuance
securities to be under equity
issued upon Weighted-average compensation plan
exercise of exercise price of (excluding
outstanding outstanding securities
options, warrants options, warrants reflected in
Plan Category and rights and rights column (a))
Equity compensation plans
approved by security holders 10,790,984 $ 1.61 2,772,923(1)
Equity compensation plans not
approved by security holders 615,200 $ 3.29 --
---------- -------- ---------
Total 11,406,184 $ 1.70 2,772,923
========== ======== =========
- ----------
(1) Does not include options to purchase 1,436,093 shares of our common stock
under the Company's stock option plan which have been exercised.
Item 6. Selected Financial Data
The following selected financial data as of and for the dates indicated
have been derived from our consolidated financial statements. You should read
the following selected financial data together with the consolidated financial
statements and related footnotes of the Company and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The selected consolidated statement of operations data of the Company for
the year ended December 31, 2004 and the balance sheet data of the Company as of
December 31, 2004 are derived from the Company's consolidated financial
statements that have been audited by Grant Thornton LLP and are included in this
Annual Report on Form 10-K. The selected consolidated statement of operations
data of the Company for each of the years in the two-year period ended December
31, 2003 and the balance sheet data of the Company as of December 31, 2003 are
derived from the Company's consolidated financial statements that have been
audited by KPMG LLP and are included in this Annual Report on Form 10-K. The
selected consolidated financial statements of operations data of the Company for
the years ended December 31, 2001 and 2000 and the balance sheet data of the
Company as of December 31, 2002, 2001 and 2000 are derived from the Company's
audited consolidated financial statements (after reclassification for
discontinued operations, as discussed below) which are not included in this
Annual Report on Form 10-K.
From inception through the first quarter of 2001, our principal business
strategy focused on the development of early-stage technology businesses with
significant Internet features and applications. In June 2001, we adopted a new
business strategy to build a global integrated logistics services organization
by identifying, acquiring and managing controlling interests in profitable
logistics businesses. On December 28, 2001, the Board of Directors approved a
plan to dispose of all of the assets related to the former business, since the
investments were incompatible with our new business strategy. Accordingly, for
financial reporting purposes, the results of operations of our former line of
business have been accounted for as a discontinued operation and have been
reclassified and reported as a separate line item in the consolidated statements
of operations.
19
Year ended December 31,
-------------------------------------------------------------
Consolidated Statement Of
Operations Data:
(In Thousands, Except Per Share Amounts) 2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
Total revenue $ 367,081 $ 220,084 $ 122,788 $ 15,598 $ --
Cost of transportation 282,359 158,106 86,085 10,009 --
--------- --------- --------- --------- ---------
Net revenue 84,722 61,978 36,703 5,589 --
Operating expenses 90,298 60,300 35,956 10,409 7,420
--------- --------- --------- --------- ---------
Income (loss) from operations (5,576) 1,678 747 (4,820) (7,420)
Other income (expense) (3,652) (1,278) 128 1,295 2,065
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income tax
expense and minority interest (9,228) 400 875 (3,525) (5,355)
Income tax expense 2,395 736 421 71 --
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations before minority
interest (11,623) (336) 454 (3,596) (5,355)
Minority interest 1,395 187 -- -- --
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations (13,018) (523) 454 (3,596) (5,355)
Loss from discontinued operations (25) (263) -- (13,863) (30,816)
--------- --------- --------- --------- ---------
Net income (loss) (13,043) (786) 454 (17,459) (36,171)
Preferred stock dividends -- -- 15,020 (4,151) (45,751)
--------- --------- --------- --------- ---------
Net income (loss) attributable to
common stockholders $ (13,043) $ (786) $ 15,474 $ (21,610) $ (81,922)
========= ========= ========= ========= =========
Basic earnings (loss) per common share:
Continuing operations $ (0.33) $ (0.02) $ 0.70 $ (0.38) $ (2.89)
Discontinued operations -- (0.01) -- (0.68) (1.75)
--------- --------- --------- --------- ---------
$ (0.33) $ (0.03) $ 0.70 $ (1.06) $ (4.64)
========= ========= ========= ========= =========
Diluted earnings (loss) per common share (1):
Continuing operations $ (0.33) $ (0.02) $ 0.02 $ (0.38) $ (2.89)
Discontinued operations -- (0.01) -- (0.68) (1.75)
--------- --------- --------- --------- ---------
$ (0.33) $ (0.03) $ 0.02 $ (1.06) $ (4.64)
========= ========= ========= ========= =========
Weighted average common shares:
Basic 38,972 29,626 22,155 20,510 17,658
========= ========= ========= ========= =========
Diluted 38,972 29,626 29,233 20,510 17,658
========= ========= ========= ========= =========
- ----------
(1) Diluted earnings per common share for 2002 excludes the impact of the July
18, 2002 exchange transaction with the holders of the Company's Series C
Preferred Stock.
Consolidated Balance Sheet Data: (In Thousands)
December 31,
----------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
Cash and cash equivalents $ 2,801 $ 3,074 $ 2,266 $ 15,228 $ 29,100
Working capital 257 13,127 4,709 15,081 27,713
Total assets 122,946 90,269 53,985 40,714 44,911
Long-term debt 1,897 1,135 -- -- --
Stockholders' equity 44,969 56,323 33,165 32,092 43,326
20
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion is intended to further the reader's understanding of our
financial condition and results of operations and should be read in conjunction
with our consolidated financial statements and related notes included elsewhere
herein. This discussion also contains statements that are forward-looking. Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of the risks and uncertainties set forth
elsewhere in this Annual Report and in our other SEC filings. Readers are
cautioned not to place undue reliance on any forward-looking statements, which
speak only as of the date hereof.
Overview
We are a non-asset-based third-party logistics services company providing
supply chain solutions on a global basis. We offer a full range of time-definite
transportation and distribution solutions through our Domestic Services platform
where we manage and arrange the movement of raw materials, supplies, components
and finished goods for our customers. These services are offered through our
domestic air and ground freight forwarding business. We offer a full range of
international logistics services including international air and ocean
transportation as well as customs house brokerage services through our
International Services platform. In addition to these core service offerings, we
also provide a broad range of value-added supply chain management services,
including warehousing, order fulfillment and inventory control solutions. We
serve a customer base of manufacturers, distributors and national retail chains
through a network of offices in 24 major metropolitan areas in North America,
one in Puerto Rico, 13 locations in Asia and 6 locations in Brazil, using an
extensive network of independent carriers and service partners strategically
located around the world.
As a non-asset-based provider of third-party logistics services, we seek
to limit our investment in equipment, facilities and working capital through
contracts and preferred provider arrangements with various transportation
providers who generally provide us with favorable rates, minimum service levels,
capacity assurances and priority handling status. The dollar volume of our
purchased transportation services enables us to negotiate attractive pricing
with our transportation providers.
Although our strategic objective is to build a leading global logistics
services organization that integrates established operating businesses and
innovative technologies, we identified a need to restructure certain of our
businesses commencing in the fourth quarter of 2004. This restructuring involves
the integration of duplicate facilities, abandonment of a major facility,
rationalization of personnel and systems and certain other actions. We expect to
complete the restructuring by the end of the second quarter of 2005. Further
limiting our acquisition strategy is the seventh amendment to our credit
facility with LaSalle Business Credit, LLC (see Note 8 to our consolidated
financial statements). This amendment includes, among other covenants, a
prohibition on further acquisitions and conditions to the payment of
contractually obligated earn-out payments. Notwithstanding these conditions in
our credit facility and our immediate-term focus on restructuring certain of the
businesses within the United States, we remain committed to our acquisition
strategy. We plan to achieve this objective by broadening our network through a
combination of synergistic acquisitions (assuming we are allowed to continue our
acquisition strategy under a replacement credit facility) and the organic
expansion of our existing base of operations. Once resumed, the focus of this
strategy will be on acquiring businesses that have demonstrated historic levels
of profitability, have a proven record of delivering high quality services, have
a customer base of large and mid-sized companies and which otherwise may benefit
from our long-term growth strategy and status as a public company.
Our acquisition strategy relies upon two primary factors: First, our
ability to identify and acquire target businesses that fit within our general
acquisition criteria and, second, the continued availability of capital and
financing resources sufficient to complete these acquisitions and fund earn-out
payments for previous 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 synergies from their integration,
and maintain the historic sales growth of the acquired businesses so as to
generate continued organic growth. The business risks associated with these
factors are discussed in Item 1 of this report under the heading "Risks
Particular to our Business."
Our principal source of income is derived from freight forwarding
services. As a freight forwarder, we arrange for the shipment of our customers'
freight from point of origin to point of destination. Generally, we quote our
customers a turnkey cost for the movement of their freight. Our price quote will
often depend upon the customer's time-definite needs (same day or later as
scheduled), special handling needs (heavy equipment, delicate
21
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 value-added logistics services which include customized
distribution and inventory control services, fulfillment services and other
value-added supply chain services.
Gross revenue represents the total dollar value of services we sell to our
customers. Our cost of transportation includes direct costs of transportation,
including motor carrier, air, ocean and rail services. We act principally as the
service provider to add value in the execution and procurement of these services
to our customers. Our net transportation revenue (gross transportation revenue
less the direct cost of transportation) is the primary indicator of our ability
to source, consolidate, add value and resell services provided by third parties,
and is considered by management to be a key performance measure. Management
believes that net revenue is also an important measure of economic performance.
Net revenue includes transportation revenue and our fee-based activities, after
giving effect to the cost of purchased transportation. In addition, management
believes measuring operating costs as a function of net revenue provides a
useful metric as our ability to control costs as a function of net revenue
directly impacts operating earnings. With respect to our services other than
freight transportation, net revenue is identical to gross revenue as the
principal costs for these services are payroll and facility costs.
Our operating results will be affected as acquisitions occur. Since all
acquisitions are made using the purchase method of accounting for business
combinations, our consolidated financial statements will only include the
results of operations and cash flows of acquired companies for periods
subsequent to the date of acquisition. Starting in the second half of 2003, we
began a program to establish an offshore network of owned offices with an
initial focus in Asia. To help facilitate the consolidation, analysis and public
reporting process, our offshore operations are included within our consolidated
results on a one-month lag, or more specifically, our calendar year results will
include results from offshore operations for the period December 1 though
November 30.
Our GAAP based net income will also be affected by non-cash charges
relating to the amortization of customer related intangible assets and other
intangible assets arising from our completed acquisitions. Under applicable
accounting standards, purchasers are required to allocate the total
consideration in a business combination to the identified assets acquired and
liabilities assumed based on their fair values at the time of acquisition. The
excess of the consideration paid over the fair value of the identifiable net
assets acquired is to be allocated to goodwill, which is tested at least
annually for impairment. Applicable accounting standards require the Company to
separately account for and value certain identifiable intangible assets based on
the unique facts and circumstances of each acquisition. As a result of the
Company's acquisition strategy, our net income (loss) will include material
non-cash charges relating to the amortization of customer related intangible
assets and other intangible assets acquired in our acquisitions. Although these
charges may increase as the Company completes more acquisitions, we believe we
are actually growing the value of our intangible assets (e.g., customer
relationships).
A significant portion of our revenue is derived from our international
operations, and the growth of those operations is an important part of our
business strategy. Our current international operations are focused on the
shipment of goods into and out of the United States and are dependent on the
volume of international trade with the United States. Our strategic plan
contemplates the growth of those operations, as well as the expansion into the
transportation of goods wholly outside of the United States. A list of the
factors that could adversely affect our current international operations has
been included in Item 1 of this Annual Report on Form 10-K, under the heading
"Risks Particular to our Business."
Our operating results are also subject to seasonal trends when measured on
a quarterly basis. Our first and second quarters are likely to be weaker as
compared with our other fiscal quarters, which we believe is consistent with the
operating results of other supply chain service providers. This trend is
dependent on numerous factors, including the markets in which we operate,
holiday seasons, consumer demand and economic conditions. Since our revenue is
largely derived from customers whose shipments are dependent upon consumer
demand and just-in-time production schedules, the timing of our revenue is often
beyond our control. Factors such as shifting demand for retail goods and/or
manufacturing production delays could unexpectedly affect the timing of our
revenue. As we increase the scale of our operations, seasonal trends in one area
may be offset to an extent by opposite trends in another area. We cannot
accurately predict the timing of these factors, nor can we accurately estimate
the impact of any particular factor, and thus we can give no assurance that
historical seasonal patterns will continue in future periods.
22
Critical Accounting Policies
Accounting policies, methods and estimates are an integral part of the
consolidated financial statements prepared by us and are based upon our current
judgments. Those judgments are normally based on knowledge and experience with
regard to past and current events and assumptions about future events. Certain
accounting policies, methods and estimates are particularly sensitive because of
their significance to the consolidated financial statements and because of the
possibility that future events affecting them may differ from our current
judgments. While there are a number of accounting policies, methods and
estimates that affect our consolidated financial statements as described in Note
2 to the consolidated financial statements, areas that are particularly
significant include revenue recognition, costs of purchased transportation,
accounting for stock options, the assessment of the recoverability of long-lived
assets, specifically goodwill and acquired intangibles, the establishment of an
allowance for doubtful accounts, useful lives for tangible and intangible assets
and the valuation allowance for deferred income tax assets.
The Company derives its revenue from three principal sources: freight
forwarding, customs brokerage, and warehousing and other value-added services.
As a freight forwarder, the Company is primarily a non-asset-based carrier that
does not own or lease any significant transportation assets. The Company
generates the majority of its revenue by purchasing transportation services from
direct (asset-based) carriers and using those services to provide to its
customers transportation of property for compensation. The Company is able to
negotiate favorable buy rates from the direct carriers by consolidating
shipments from multiple customers and concentrating its buying power, while at
the same time offering lower sell rates than most customers would otherwise be
able to negotiate themselves. When acting as an indirect carrier, the Company
will enter into a written agreement with its customers or issue a tariff and a
house bill of lading to customers as the contract of carriage. When the freight
is physically tendered to a direct carrier, the Company receives a separate
contract of carriage, or master bill of lading. In order to claim for any loss
associated with the freight, the customer is first obligated to pay the freight
charges. Based on the terms in the contract of carriage, revenue related to
shipments where the Company issues a house bill of lading is recognized when the
freight is delivered to the direct carrier at origin. Costs related to the
shipment are also recognized at this same time. Most transportation costs are
estimated at the time of shipment and such estimates are updated for differences
between estimated and actual amounts at the time invoices are processed for
payment. Our revised processes for domestic purchased transportation costs also
require the assessment of the adequacy of the recorded estimates. All other
revenue, including revenue for customs brokerage and warehousing and other
value-added services, is recognized upon completion of the service.
In certain instances, accounting principles generally accepted in the
United States of America allow for the selection of alternative accounting
methods. Two alternative methods for accounting for stock options are available
- - the intrinsic value method and the fair value method. We use the intrinsic
value method of accounting for stock options, and accordingly, no compensation
expense is recognized for options issued at an exercise price equal to or
greater than the quoted market price on the date of grant to employees, officers
and directors. Under the fair value method, the determination of the pro forma
amounts involves several assumptions including option life and volatility. If
the fair value method were used, both basic and diluted loss per share would
have increased by $0.15 in 2004.
As discussed in Note 2 to the consolidated financial statements, the
goodwill arising from our acquisitions is not amortized, but instead is tested
for impairment at least annually in accordance with the provisions of Statement
of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets. The impairment test requires several estimates including future cash
flows, growth rates and the selection of a discount rate. In addition, the
acquired intangibles arising from those transactions are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. The recoverability of long-lived assets to be
held and used (including our identifiable intangible assets) is assessed by
comparing the carrying amount of the asset to the future net undiscounted cash
flows expected to be generated by the asset. In developing our future cash flow
estimates, we incorporate assumptions that marketplace participants would use in
their estimates, including, among other things, that (i) existing operations are
evaluated on a stand-
23
alone basis and, as such, achieve no revenue or cost synergies, (ii) no further
acquisitions are made, (iii) formerly acquired companies achieve their earnings
targets and their earn-outs are fully paid, (iv) future earnings are fully taxed
and (v) no additional equity is raised. We cannot guarantee that our assets will
not be impaired in future periods.
Acquired intangibles consist of customer related intangibles and
non-compete agreements arising from the Company's acquisitions. Customer related
intangibles are amortized using accelerated methods over five to seven years and
non-compete agreements are amortized using the straight-line method over periods
of three to five years.
We maintain reserves for specific and general allowances against accounts
receivable. The specific reserves are established on a case-by-case basis by
management. A general reserve is established for all other accounts receivable,
based on a specified percentage of the accounts receivable balance. We
continually assess the adequacy of the recorded allowance for doubtful accounts,
based on our knowledge about the customer base. While credit losses have
historically been within our expectations and the provisions established, we
cannot guarantee that we will continue to experience the same credit loss rates
that we have in the past.
Our discontinued operations, which focused on the development of
early-stage technology businesses, and our continuing operations have generated
significant net operating loss carryforwards (NOLs) which could have value in
the future. After giving effect for certain annual limitations based on changes
in ownership as defined in Section 382 of the Internal Revenue Code, we estimate
that approximately $47.0 million in NOLs may be available to offset future
federal taxable income. Under SFAS No. 109, Accounting for Income Taxes, we are
required to provide a valuation allowance to offset deferred tax assets if,
based upon available evidence, it is more likely than not that some or all of
the deferred tax assets will not be realized. At December 31, 2004, the
valuation allowance was $23.1 million. Given our historical losses and our
limited track record to date, we maintained a full valuation allowance against
our deferred tax assets as of December 31, 2004. We had deferred tax liabilities
of approximately $1.7 million at December 31, 2004 and approximately $1.0
million at December 31, 2003, primarily related to the tax amortization of
goodwill, which is deductible for tax purposes over a life of 15 years but is
not amortized for book purposes. We do not anticipate paying federal income
taxes in the near future as we expect that our existing NOLs will be sufficient
to offset current taxable income, if any. However, additional sales of our
securities could have the effect of significantly limiting our ability to
utilize our existing NOLs in the future.
Discontinued Operations
Prior to the first quarter of 2001, our principal business was developing
early-stage technology businesses with significant Internet features and
applications. Largely as a result of the significant correction in the global
stock markets which began during 2000, and the corresponding decrease in the
valuation of technology businesses and contraction in the availability of
venture financing during 2001, we elected to shift our business strategy to
focus on the acquisition of operating businesses within a particular industry
segment. Following a wind down of the technology business during the second
quarter of 2001, we focused our acquisition efforts specifically within the
transportation and logistics industry. This decision occurred in conjunction
with our June 21, 2001 appointment of Dennis L. Pelino as our Chairman and Chief
Executive Officer. Mr. Pelino brings to us over 25 years of logistics
experience, including most recently, as President and Chief Operating Officer of
Fritz Companies, Inc., where he was employed from 1987 to 1999.
To reflect the change in business model, our consolidated financial
statements have been presented in a manner in which the assets, liabilities,
results of operations and cash flows related to our former business have been
segregated from that of our continuing operations and are presented as
discontinued operations.
24
Results Of Operations
Year ended December 31, 2004 compared to year ended December 31, 2003
The following table summarizes our total revenue, net transportation
revenue and other revenue (in thousands):
Change
----------------------
2004 2003 Amount Percent
--------- --------- --------- ---------
Total revenue $ 367,081 $ 220,084 $ 146,997 66.8%
========= ========= =========
Transportation revenue $ 343,460 $ 203,187 $ 140,273 69.0
Cost of transportation 282,359 158,106 124,253 78.6
--------- --------- ---------
Net transportation revenue 61,101 45,081 16,020 35.5
Net transportation margin 17.8% 22.2%
Customs brokerage 9,393 10,027 (634) (6.3)
Warehousing and other value-added services 14,228 6,870 7,358 107.1
--------- --------- ---------
Net revenue $ 84,722 $ 61,978 $ 22,744 36.7%
========= ========= =========
Net revenue margin 23.1% 28.2%
========= =========
Total revenue was $367.1 million in 2004, an increase of 66.8% over total
revenue of $220.1 million in 2003. $39.4 million or 26.8% of the increase in
total revenue was attributable to same store growth with $107.6 million or 73.2%
of the increase in total revenue attributable to acquisitions. The Domestic
Services platform delivered $145.2 million in total revenue in 2004, an
improvement of $15.7 million or 12.1% over the same prior year period with $14.0
million of the increase coming from same store growth and the remaining $1.7
million coming from acquisitions. The International Services platform delivered
$221.9 million in total revenue for 2004, a period over period improvement of
$131.3 million or 144.9%, with $25.3 million of the increase coming from same
store growth and the remaining $106.0 million improvement attributed to
acquisitions, primarily Shaanxi.
Net transportation revenue was $61.1 million in 2004, an increase of 35.5%
over net transportation revenue of $45.1 million in 2003. $4.0 million or 25.0%
of the increase was attributable to same store growth with $12.0 million or
75.0% of the increase in net transportation revenue attributable to
acquisitions. The Domestic Services platform delivered $32.6 million of net
transportation revenue in 2004, a decrease of $0.8 million or 2.4% compared to
the same prior year period with a $1.2 million decrease in same store activity,
which was driven by low margin transportation business under a broad services
contract with a large customer and higher fuel surcharges absorbed by the
business, partially offset by an increase of $0.4 million from acquisitions. The
International Services platform delivered $28.5 million of net transportation
revenue in 2004, a period over period improvement of $16.8 million or 143.3%,
with $3.9 million of the increase coming from same store growth and the
remaining $12.9 million improvement attributed to acquisitions, primarily
Shaanxi.
Net transportation margin decreased to 17.8% for the year ended December
31, 2004 from 22.2% for the comparable period in 2003 primarily driven by the
change in revenue mix resulting from the recent acquisitions within the
International Services platform, which generally operate at lower margins than
those found in the Domestic Services platform. The International Services
expansion has added significantly to our global capabilities required by our
customers. For the International Services platform, net transportation margin
has declined in line with previous expectations to 13.6% from 14.9% as a result
of the general rate increases and fuel surcharges imposed by the underlying
asset-based carriers as well as the impact of the Shaanxi transaction in early
2004. Shaanxi operates principally as a wholesaler of airfreight which carries
lower margins but provides the International Services platform with the
opportunity for growth in the higher-margin retail component of the airfreight
business. Net transportation margin for the Domestic Services platform decreased
to 24.5% for the year ended December 31, 2004 from 26.9% for the comparable
period in 2003 driven primarily by one low margin piece of business that the
Company exited in 2004 and higher fuel surcharges.
Customs brokerage and other value-added services revenue was $23.6 million
in 2004, an increase of 39.8% over $16.9 million in 2003. $6.5 million or 96.3%
of the increase was attributable to same store growth with $0.2 million or 3.7%
of the increase attributable to acquisitions. The Domestic Services platform
delivered $12.2
25
million of revenue from these services in 2004, an improvement of $7.0 million
or 128.3% over the same prior year period with $6.5 million of the increase
coming from same store growth, driven by the start-up of a significant new
account, and the remaining $0.5 million coming from acquisitions. The
International Services platform delivered $11.4 million of revenue from these
services in 2004, a period over period decrease of $0.3 million or 2.2%, driven
primarily by a decline in activity from a large customer. The customs brokerage
and other value-added services revenue from this large customer is expected to
continue at this level through 2005.
Net revenue was $84.7 million in 2004, an increase of 36.7% over net
revenue of $62.0 million in 2003. $10.4 million or 45.7% of the increase was
attributable to same store growth with $12.3 million or 54.3% of the increase
attributable to acquisitions. The Domestic Services platform delivered $44.8
million of net revenue in 2004, an improvement of $6.2 million or 16.0% over the
same prior year period with $5.2 million of the increase coming from same store
growth and the remaining $1.0 million coming from acquisitions. The
International Services platform delivered $39.9 million of net revenue in 2004,
a period over period improvement of $16.5 million or 70.9%, with $5.2 million of
the increase coming from same store growth and the remaining $11.3 million
improvement attributable to acquisitions.
Net revenue margin decreased to 23.1% for 2004 compared to 28.2% for 2003.
This decrease in net revenue margin is primarily the result of the expansion of
our International Services platform, which traditionally has lower margins,
through multiple acquisitions in 2003 and 2004 which added significantly to our
global capabilities. Net revenue margin for the Domestic Services platform
increased to 30.9% for the year ended December 31, 2004 from 29.8% for the
comparable period in 2003 driven primarily by growth in other value-added
services provided in connection with the start-up of a significant new account.
This increase was partially offset by higher fuel surcharges absorbed by the
business and one low margin piece of business that the Company exited in 2004.
Net revenue margin for the International Services platform decreased in line
with previous expectations to 18.0% for the year ended December 31, 2004 from
25.8% for the comparable period in 2003 as a result of the general rate
increases and fuel surcharges imposed by the underlying asset-based carriers as
well as the impact of the Shaanxi transaction in early 2004. Shaanxi operates
principally as a wholesaler of airfreight which carries lower margins but
provides the International Services platform with the opportunity for growth in
the higher-margin retail component of the airfreight business.
26
The following table summarizes certain historical consolidated statement
of operations data as a percentage of our net revenue (in thousands):
2004 2003 Change
-------- -------- -------- -------- -------- --------
Amount Percent Amount Percent Amount Percent
-------- -------- -------- -------- -------- --------
Net revenue $ 84,722 100.0% $ 61,978 100.0% $ 22,744 36.7%
-------- -------- -------- -------- --------
Personnel costs 44,988 53.1 31,888 51.5 13,100 41.1
Other selling, general and
administrative costs 36,753 43.4 24,583 39.7 12,170 49.5
Depreciation and amortization 4,189 4.9 2,660 4.3 1,529 57.5
Restructuring charges 4,368 5.2 -- -- 4,368 NM
Litigation settlement and
nonrecurring costs -- -- 1,169 1.8 (1,169) (100.0)
-------- -------- -------- -------- --------
Total operating costs 90,298 106.6 60,300 97.3 29,998 49.7
-------- -------- -------- -------- --------
Income (loss) from operations (5,576) (6.6) 1,678 2.7 (7,254) NM
Provisions for excess earn-out
payments (3,075) (3.6) (1,270) (2.1) (1,805) (142.1)
Interest income 62 0.1 49 0.1 13 26.5
Interest expense (640) (0.8) (142) (0.2) (498) (350.7)
Other income, net 1 0.0 85 0.1 (84) (98.8)
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before income taxes
and minority interest (9,228) (10.9) 400 0.6 (9,628) NM
Income tax expense 2,395 2.8 736 1.2 1,659 225.4
-------- -------- -------- -------- --------
Loss from continuing operations
before minority interest (11,623) (13.7) (336) (0.6) (11,287) (3,359.2)
Minority interest 1,395 1.7 187 0.3 1,208 646.0
-------- -------- -------- -------- --------
Loss from continuing operations (13,018) (15.4) (523) (0.9) (12,495) (2,389.1)
Loss from discontinued operations (25) 0.0 (263) (0.4) 238 90.5
-------- -------- -------- -------- --------
Net loss $(13,043) (15.4)% (786) (1.3) $(12,257) (1,559.4)%
======== ======== ======== ======== ========
Personnel costs were $45.0 million in 2004, an increase of 41.1% over
$31.9 million in 2003. $8.0 million or 61.1% of the increase was attributable to
same store growth with $5.1 million or 38.9% of the increase attributable to
acquisitions. The Domestic Services platform incurred $25.1 million in personnel
costs in 2004, an increase of $5.1 million and 25.6% over the same prior year
period with $4.3 million of the increase coming from same store growth and the
remaining $0.8 million coming from acquisitions. The International Services
platform incurred $19.9 million in personnel costs for 2004, a period over
period increase of $8.0 million or 67.0%, with $3.7 million of the increase
coming from same store growth and the remaining $4.3 million increase attributed
to acquisitions. As a percentage of net revenue, personnel costs increased in
2004 to 53.1% compared to 51.5% in 2003. This increase was due to staff
increases in sales and marketing in the International Services platform in the
second half of 2004 partially offset by operations and sales and marketing staff
reductions in the Domestic Services platform.
The number of employees increased to 1,169 at December 31, 2004 from 827
at December 31, 2003, an increase of 342 employees or 41.4%. Of the total number
of employees, 866 or 74.1% of the employees are engaged in operations; 86 or
7.4% of the employees are engaged in sales and marketing; and 217 or 18.5% of
the employees are engaged in finance, administration, and management functions.
Additionally, approximately 335 or 98.0% of the total increase in employees was
attributable to acquisitions, while same store employee headcount increased by
seven or 2.0% of the total increase in employees.
Other selling, general and administrative costs were $36.8 million in
2004, an increase of 49.5% over $24.6 million in 2003. $8.2 million or 66.9% of
the increase was attributable to same store growth including increased expenses
for leased equipment and facilities to support a broad services contract with a
large customer and $4.0 million or 33.1% of the increase attributable to
acquisitions. The Domestic Services platform incurred $26.6 million of other
selling, general and administrative costs in 2004, an increase of $6.9 million
and 35.4% over the same prior year period with $5.9 million of the increase
coming from same store growth and the remaining $1.0 million coming from
acquisitions. The International Services platform had $10.1 million in other
selling, general and administrative costs for 2004, a period over period
increase of $5.2 million or 106.3%, with $2.2 million of the increase coming
from same store growth and the remaining $3.0 million increase attributed to
acquisitions. As a percentage of net revenue, other selling and administrative
costs increased in 2004 to 43.4% compared to 39.7% in 2003. This increase was
primarily due to non-recurring charges incurred in the first quarter of 2004
related to bad debts,
27
communications and technology costs and higher than expected costs related to
our Sarbanes-Oxley compliance initiatives.
Depreciation and amortization amounted to $4.2 million for the year ended
December 31, 2004, an increase of $1.5 million or 57.5% over the comparable
period in 2003 principally due to amortization of acquired intangible assets
acquired in the Shaanxi and other Asian transactions. See Notes 5 and 6 to the
Company's consolidated financial statements.
Restructuring costs were $4.4 million for the year ended December 31, 2004
and are comprised of $3.6 million write-off of certain technology assets, $0.7
million of personnel related charges and $0.1 million of lease termination
charges.
Litigation and nonrecurring costs were $1.2 million for the year ended
December 31, 2003 and are comprised of $0.8 million paid to settle litigation
commenced against the Company in August 2000 in a combination of $0.4 million in
cash and $0.4 million in Company stock, and $0.4 million associated with the SEC
review and delayed effectiveness of a registration statement filed in connection
with a March 2003 private placement.
Loss from operations was $5.6 million in 2004, compared to income from
operations of $1.7 million for 2003.
Provisions for excess earn-out payments represent the amount paid to
former owners of acquired businesses that, as a result of the restatement of our
financial performance for 2003, was in fact in excess of the amount that would
have been paid out based on the restated financial results for 2003. Due to the
uncertainty of collecting the excess payments, the Company has fully reserved
for the resulting receivable from the former owners. If excess amounts paid are
recovered in the future, those proceeds would be reflected as other income in
the Company's consolidated statement of operations.
Interest income was relatively flat in 2004 and 2003, and remained an
insignificant component of the Company's overall financial performance.
Interest expense was $0.6 million for the year ended December 31, 2004
compared to $0.1 million in the comparable prior year period driven by advances
on our revolving credit facility used to fund acquisitions and working capital
during 2004.
Loss from continuing operations before income taxes and minority interest
was $9.2 million in 2004 compared to income from continuing operations before
income taxes and minority interest of $0.4 million in 2003.
As a result of historical losses related to investments in early-stage
technology businesses and our subsequent transition to a third-party logistics
services provider, the Company has accumulated federal NOLs. The Company has
approximately $47.0 million of NOLs as of December 31, 2004 to offset future
federal taxable income. The Company does not anticipate paying significant
federal income taxes in the near future because it expects that the NOLs will be
sufficient to offset substantially all of its federal income tax liability, if
any. In addition to minor state income taxes and approximately $1.7 million of
foreign income taxes, the Company recorded deferred income taxes amounting to
$0.6 million and $0.6 million for the years ended December 31, 2004 and 2003,
respectively, primarily related to amortization of goodwill for income tax
purposes. This provision will increase as the goodwill related to the Company's
U.S.-based operations is amortized over its tax life of fifteen years.
Loss from continuing operations before minority interest was $11.6 million
in 2004, compared to a loss of $0.3 million in 2003.
Minority interest for the year ended December 31, 2004 was $1.4 million
compared to $0.2 million in 2003. The increase was primarily related to the
Shaanxi operation, acquired in February 2004, of which the Company owns a 55%
interest.
Loss from discontinued operations was nominal in 2004. The loss from
discontinued operations in 2003 reflects the costs associated with the remaining
lease liability of a property used in the Company's former internet business, as
well as a payment made to a consultant for services provided in 2000.
28
Net loss was $13.0 million in 2004, compared to $0.8 million in 2003.
Basic and diluted loss per share was ($0.33) for 2004 compared to a loss of
($0.03) per basic and diluted share for 2003.
Year ended December 31, 2003 compared to year ended December 31, 2002
The following table summarizes our total revenue, net transportation
revenue and other revenue (in thousands):
Change
----------------------
2003 2002 Amount Percent
--------- --------- --------- ---------
Total revenue $ 220,084 $ 122,788 $ 97,296 79.2%
========= ========= =========
Transportation revenue $ 203,187 $ 113,510 $ 89,677 79.0
Cost of transportation 158,106 86,085 72,021 83.7
--------- --------- ---------
Net transportation revenue 45,081 27,425 17,656 64.4
Net transportation margin 22.2% 24.2%
Customs brokerage 10,027 6,290 3,737 59.4
Warehousing and other value-added services 6,870 2,988 3,882 129.9
--------- --------- ---------
Net revenue $ 61,978 $ 36,703 $ 25,275 68.9
========= ========= =========
Net revenue margin 28.2% 29.9%
========= =========
Total revenue was $220.1 million for the year ended December 31, 2003, an
increase of $97.3 million or 79.2% over total revenue of $122.8 million for the
comparable period in 2002. $17.1 million or 17.6% of the increase in total
revenue was attributable to the operations of the businesses we acquired in
2003; $24.3 million or 25.0% was due to an increase in same store growth; and
the remaining $55.9 million or 57.4% of the increase was attributable to
operations acquired or launched as new operations over the course of 2002 which
included the Global and United American acquisitions as well as the office in
Hong Kong that was opened in the third quarter of 2002.
Net transportation revenue was $45.1 million for the year ended December
31, 2003, an increase of $17.7 million or 64.4% over net transportation revenue
of $27.4 million for the comparable period in 2002. $3.8 million or 21.5% of the
increase in net transportation revenue was attributable to the operations of the
businesses we acquired in 2003; $5.1 million or 28.8% was due to same store
growth; and the remaining $8.8 million or 49.7% of the increase was attributable
to operations acquired or launched as new operations over the course of 2002
which included the Global and United American acquisitions as well as the office
in Hong Kong that was opened in the third quarter of 2002.
Net transportation margin decreased to 22.2% for the year ended December
31, 2003 from 24.2% for the comparable period in 2002. This decrease in net
transportation margin is primarily the result of the addition in the second
quarter of 2002 of our International Services platform, which traditionally has
lower margins, and its expansion through our 2003 acquisitions of CSI and G-Link
Singapore and Cambodia. Net transportation margin for the International Services
platform, while still reducing the consolidated net transportation margin, did
increase to 14.9% for the year ended December 31, 2003 from 13.9% for the
comparable period in 2002 driven primarily by increased capacity purchasing
power at our emerging Hong Kong facility. Net transportation margin for the
Domestic Services platform decreased to 26.9% for the year ended December 31,
2003 from 29.2% for the comparable period in 2002 driven primarily by one low
margin piece of business that the Company ultimately exited in 2004.
Customs brokerage and other value-added services revenue was $16.9 million
for the year ended December 31, 2003, an increase of $7.6 million over customs
brokerage and other value-added services revenue of $9.3 million in the
comparable period of 2002. $3.1 million or 40.8% of the increase was
attributable to same store growth; $0.3 million or 3.9% of the increase was
attributable to operations of the businesses we acquired in 2003; and the
remaining $4.2 million or 55.3% of the increase was attributable to operations
acquired or launched as new operations over the course of 2002, which included
the Global and United American acquisitions as well as the office in Hong Kong
that was opened in the third quarter of 2002.
Net revenue was $62.0 million for the year ended December 31, 2003, an
increase of $25.3 million or 68.9% over net revenue of $36.7 million for the
comparable period in 2002. $4.1 million or 16.2% of the increase in
29
net revenue was attributable to the operations of the businesses we acquired in
2003; $8.3 million or 32.8% was due to same store growth; and the remaining
$12.9 million or 51.0% of the increase was attributable to an incremental
quarter of Global and United American results and an incremental three quarters
of Hong Kong results in 2003 over 2002.
Net revenue margin decreased to 28.2% for 2003 compared to 29.9% for 2002.
This decrease in net revenue margin is primarily the result of the addition in
the second quarter of 2002 of our International Services platform, which
traditionally has lower margins, and its expansion through our 2003 acquisitions
of CSI and G-Link Singapore and Cambodia. Net revenue margin for the
International Services platform decreased to 25.8% for the year ended December
31, 2003 from 27.5% for the comparable period in 2002. Net revenue margin for
the Domestic Services platform decreased to 29.8% for the year ended December
31, 2003 from 31.2% for the comparable period in 2002 driven primarily by one
low margin piece of business that the Company ultimately exited in 2004.
The following table summarizes certain historical consolidated statement
of operations data as a percentage of our net revenue (in thousands):
2003 2002 Change
-------- -------- -------- -------- -------- --------
Amount Percent Amount Percent Amount Percent
-------- -------- -------- -------- -------- --------
Net revenue $ 61,978 100.0% $ 36,703 100.0% $ 25,275 68.9%
-------- -------- -------- -------- --------
Personnel costs 31,888 51.5 19,089 52.0 12,799 67.0
Other selling, general and
administrative costs 24,583 39.7 14,680 40.0 9,903 67.5
Depreciation and amortization 2,660 4.3 2,187 6.0 473 21.6
Litigation settlement and
nonrecurring costs 1,169 1.8 -- -- 1,169 NM
-------- -------- -------- -------- --------
Total operating costs 60,300 97.3 35,956 98.0 24,344 67.7
-------- -------- -------- -------- --------
Income from operations 1,678 2.7 747 2.0 931 124.6
Provisions for excess earn-out
payments (1,270) (2.1) -- -- (1,270) NM
Interest income 49 0.1 91 0.3 (42) (46.2)
Interest expense (142) (0.2) -- -- (142) NM
Other income, net 85 0.1 37 0.1 48 129.7
-------- -------- -------- -------- --------
Income from continuing operations
before income taxes and
minority interest 400 0.6 875 2.4 (475) (54.3)
Income tax expense 736 1.2 421 1.2 315 74.8
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before minority
interest (336) (0.6) 454 1.2 (790) NM
Minority interest 187 0.3 -- -- 187 NM
-------- -------- -------- -------- --------
Income (loss) from continuing
operations (523) (0.9) 454 1.2 (977) NM
Loss from discontinued operations (263) (0.4) -- -- (263) NM
-------- -------- -------- -------- --------
Net income (loss) (786) (1.3) 454 1.2 (1,240) NM
Preferred stock dividends -- -- 15,020 40.9 (15,020) (100.0)
-------- -------- -------- -------- --------
Net income (loss) attributable to
common stockholders $ (786) (1.3)% $ 15,474 42.1% $(16,260) NM
======== ======== ======== ======== ========
Personnel costs were $31.9 million for the year ended December 31, 2003,
an increase of $12.8 million or 67.0% over personnel costs of $19.1 million for
the comparable period in 2002. $1.4 million or 10.9% of the increase in
personnel costs was attributable to the operations of the businesses we acquired
in 2003; $4.2 million or 32.8% was due to same store growth; and $7.2 million or
56.3% of the increase was attributable to operations acquired or launched as new
operations over the course of 2002 which included the Global and United American
acquisitions as well as the office in Hong Kong that was opened in the third
quarter of 2002. Personnel costs as a percentage of net revenue decreased to
51.5% from 52.0% year over year.
The number of employees increased to 827 at December 31, 2003 from 510 at
December 31, 2002, an increase of 317 employees or 62.2%. Of the total number of
employees, 622 or 75.2% of the employees are engaged in operations; 57 or 6.9%
of the employees are engaged in sales and marketing; and 148 or 17.9% of the
employees are engaged in finance, administration, and management functions.
Additionally, approximately 185 or 58.4% of the total increase in employees was
attributable to acquisitions, while approximately 130 employees or 41.6% were
added to meet the demands of the increase in our business in 2003.
30
Other selling, general and administrative costs were $24.6 million for the
year ended December 31, 2003, an increase of $9.9 million or 67.5% over other
selling, general and administrative costs of $14.7 million for the comparable
period in 2002. $1.7 million or 17.2% of the increase was attributable to the
operations of the businesses we acquired in 2003; $5.3 million or 53.5% was due
to same store growth; and $2.9 million or 29.3% of the increase was attributable
to operations acquired or launched as new operations over the course of 2002
which included the Global and United American acquisitions as well as the office
in Hong Kong. As a percentage of net revenue, other selling general and
administrative costs decreased to 39.7% from 40.0% year over year.
Depreciation and amortization amounted to $2.7 million for the year ended
December 31, 2003, an increase of $0.5 million or 21.6% over the comparable
period in 2002 principally due to amortization of acquired intangible assets
acquired in the Regroup and G-Link transactions. See Note 6 to the Company's
consolidated financial statements.
Litigation and nonrecurring costs were $1.2 million for the year ended
December 31, 2003 and are comprised of $0.8 million paid to settle litigation
commenced against the Company in August 2000 in a combination of $0.4 million in
cash and $0.4 million in Company stock, and $0.4 million associated with the SEC
review and delayed effectiveness of a registration statement filed in connection
with a March 2003 private placement.
Income from operations was $1.7 million in 2003, compared to $0.7 million
for 2002.
Provisions for excess earn-out payments represent the amount paid to
former owners of acquired businesses that, as a result of the restatement of our
financial performance for 2003, was in fact in excess of the amount that would
have been paid out based on the restated financial results for 2003. Due to the
uncertainty of collecting the excess payments, the Company has determined that
the resulting receivable from the former owners should be fully reserved for. If
excess amounts paid are recovered in the future, those proceeds would be
reflected as other income in the Company's consolidated statement of operations.
Interest income was nominal for the year ended December 31, 2003 compared
to interest income of $0.1 million for the comparable prior year period. With
year over year cash balances being reduced as a result of our acquisition
program, interest income remained an insignificant component of the Company's
overall financial performance.
Interest expense was $0.1 million for the year ended December 31, 2003
compared to no interest expense in the comparable prior year period driven by
advances on our revolving credit facility used to fund acquisitions and working
capital during 2003.
Income from continuing operations before income taxes and minority
interest was $0.4 million in 2003 compared to $0.9 million in 2002.
As a result of historical losses related to investments in early-stage
technology businesses and our subsequent transition to a third-party logistics
services provider, the Company has accumulated federal NOLs. In addition to
minor state and foreign income taxes, the Company recorded deferred income taxes
amounting to $0.6 million and $0.4 million for the years ended December 31, 2003
and 2002, respectively, primarily related to amortization of goodwill for income
tax purposes. This provision will increase as the goodwill related to the
Company's U.S.-based operations is amortized over its tax life of fifteen years.
Loss from continuing operations before minority interest was $0.3 million
in 2003, compared to income of $0.5 million in 2002.
Minority interest for the year ended December 31, 2003 was $0.2 million
and was primarily related to the G-Link operations, acquired in August 2003, of
which the Company owns a 70% interest.
The losses from discontinued operations in 2003 reflect the costs
associated with the remaining lease liability of a property used in the
Company's former internet business, as well as a payment made to a consultant
for services provided in 2000.
Net loss was $0.8 million in 2003, compared to net income of $0.5 million
in 2002.
31
In 2002, the Company recorded a net non-cash benefit of $15.0 million
associated with the restructuring of our Series C Preferred stock, after giving
effect to $1.9 million in preferred stock dividends. See Note 12 to the
consolidated financial statements.
Net loss attributable to common stockholders was $0.8 million in 2003,
compared to net income attributable to common stockholders of $15.5 million in
2002. Basic loss per share was ($0.03) for 2003 compared to earnings per share
of $0.70 for 2002. Diluted loss per share was ($0.03) for 2003 compared to
earnings per share of $0.02 for 2002. Diluted earnings per share for 2002
excludes the net effect of the Series C exchange transaction.
Disclosures About Contractual Obligations
The following table aggregates all contractual commitments and commercial
obligations that affect the Company's financial condition and liquidity position
as of December 31, 2004 (in thousands):
Less than 1 - 3 3 - 5 More than
Contractual Obligations 1 year years years 5 years Total
--------- --------- --------- --------- ---------
Operating lease obligations $ 8,578 $ 12,522 $ 1,952 $ 1,516 $ 24,568
Capital lease obligations 1,510 -- -- -- 1,510
Earn-out payable 2,646 -- -- -- 2,646
Other long-term liabilities reflected on the
Company's consolidated balance sheet under
GAAP (a) -- 1,898 -- -- 1,898
Lines of credit 16,912 -- -- -- 16,912
Letter of credit 150 -- -- -- 150
--------- --------- --------- --------- ---------
Total contractual obligations 29,796 14,420 1,952 1,516 47,684
Contingent earn-out obligations (b) (c) -- 27,453 3,417 -- 30,870
--------- --------- --------- --------- ---------
Total contractual and contingent obligations $ 29,796 $ 41,873 $ 5,369 $ 1,516 $ 78,554
========= ========= ========= ========= =========
- ----------
(a) Consists of a note payable to the former owner of Shaanxi amounting to
$1,898 due March 31, 2006.
(b) Consists of potential obligations related to earn-out payments to the
former owners of our existing subsidiaries, as discussed under Liquidity
and Capital Resources.
(c) During the 2005-2008 earn-out period, there is an additional contingent
obligation related to tier-two earn-outs that could be as much as $18.0
million if certain of the acquired companies generate an incremental $37.0
million in pre-tax earnings.
Financial Outlook
We believe that gross revenues will be approximately $375 million in 2005.
Due to a number of factors, including the financial performance of our Domestic
Services operations, the Company's intent to restructure its operations to
realize synergies as part of the Company's overall acquisition strategy and
future efforts to realize efficiencies from a newly developed operating system,
we are not able to provide guidance at this time about expected future
performance beyond gross revenues.
Our restructuring initiative includes the rationalization of facilities
and personnel within the U.S. Some of these initiatives have been defined but
much remains to be defined and implemented. This initiative resulted in a
material charge which negatively impacted the Company's financial results in the
fourth quarter of 2004. We will provide guidance in the future, but only after
our plan is fully implemented and the newly streamlined operations have been
functioning for a reasonable period of time. This moratorium on financial
performance guidance will be in effect for 2005 and perhaps beyond. All
previously issued financial guidance did not reflect the impact of the decreased
financial performance of the Domestic Services platform or restructuring
discussed above, nor was management aware of these issues at the time that the
previously issued guidance was provided. For these reasons, previously issued
guidance relative to operating results for 2005 has been withdrawn.
Sources of Growth
Management believes that a comparison of "same store" growth is critical
in the evaluation of the quality and extent of the Company's internally
generated growth. This "same store" analysis isolates the revenue contributions
from operations that have been included in the Company's operating results for
the full comparable
32
prior year period. The table below presents "same store" comparisons for the
year ended December 31, 2004 (which is the measure of any increase from the same
period of 2003).
For the year ended
December 31, 2004
-----------------------
Domestic 10.6%
International 29.9%
Total 18.7%
Liquidity and Capital Resources
As we approach the next stage of our development, we need to augment our
capital structure by replacing our U.S. Facility and by obtaining additional
capital from other sources. This may take the form of subordinated debt,
convertible preferred stock and/or common stock, among others. Such an enhanced
capital structure would permit continued expansion, but at a far slower pace
than it has in the past. There is no assurance that we will be able to replace
our U.S. Facility, that additional capital will be available, or if available,
at terms acceptable to us.
The seasonal trend of the business together with earnout payments presents
significant liquidity challenges for the Company at the end of the first quarter
of each year. These challenges have been magnified by the acceleration of $1.4
million in lease payments in connection with a cross default provision in the
lease documents. (See Notes 8 and 18 to the consolidated financial statements).
These needs will be satisfied by the deferral of certain earn-out payments for
the purchases of certain subsidiaries and the successful raising of additional
equity and debt financing, all of which are in various steps of completion.
Cash and cash equivalents totaled $2.8 million and $3.1 million as of
December 31, 2004 and 2003. Working capital totaled $0.3 million and $13.1
million at December 31, 2004 and 2003.
Cash used in operating activities was $1.6 million for 2004 compared to
$4.0 million used in 2003, which included a decrease of $12.2 million in working
capital.
Net cash used in investing activities was $16.4 million in 2004 compared
to $15.9 million used in 2003. Investing activities were driven principally by
the acquisition of new businesses. We deployed $8.0 million for the acquisition
of new businesses in 2004 compared to $9.4 million in 2003 and $2.7 million in
support of our web-based operating platform, Tech-Logis(TM), in 2004 compared to
$3.2 million in 2003. In addition, we funded $3.4 million in earn-out payments
in 2004.
Cash provided by financing activities generated $17.7 million in 2004
compared to cash provided by financing activities of $20.7 million in 2003. In
2004, we borrowed $16.9 million under our lines of credit, received $1.8 million
of proceeds from exercised options and warrants and paid debt financing fees of
$0.2 million and capital lease payments of $0.8 million.
We paid $6.5 million in cash for earn-outs on or around April 1, 2004
based on initially the 2003 performance of certain of our acquired companies
relative to their respective pre-tax earnings targets that we believed to be
accurate at the time of the payments. Based on restated financial results for
the year ended December 31, 2003, we have determined that amounts were paid in
excess of amounts due by approximately $3.1 million. We have fully reserved
these receivables because of differing interpretations, by the Company and the
selling shareholders, of the earn-out provisions of the purchase agreements. We
will attempt to recover the excess amounts paid from the former owners of the
acquired businesses. Any amounts we recover will result in the recognition of
non-operating income in the period recovered.
On July 18, 2002 we completed a private exchange transaction that
eliminated approximately $44.6 million, the 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
years, and a new class of Series D preferred stock that would convert into
3,607,420 shares of our common stock no later than December 31, 2004. The terms
of the Series D preferred stock were structured to make it much like a common
equity equivalent in that (1) it received no dividend, (2) it was subordinated
to new rounds of equity, and (3) it held a limited liquidation preference which
expired at the end of 2003. In addition, the holders of the Series D preferred
stock were restricted from selling the common stock received upon conversion of
the Series D preferred stock until July 19, 2003 and were permitted limited
resale based on trading volume through July 19, 2004.
33
We may receive proceeds in the future from the exercise of warrants and
options outstanding as of February 28, 2005 in accordance with the following
schedule:
Number of Shares Proceeds
---------------- ------------
Options outstanding under our stock option plan 10,757,451 $ 17,336,395
Non-plan options 615,200 2,026,750
Warrants 1,957,784 4,417,794
------------ ------------
Total 13,330,435 $ 23,780,939
============ ============
Effective November 17, 2004, we amended our revolving credit facility with
LaSalle Business Credit, LLC (the "U.S. Facility"). The U.S. Facility is
collateralized by accounts receivable and other assets of the Company and its
subsidiaries. The U.S. Facility requires the Company and its U.S. subsidiaries
to comply with certain financial covenants. Advances under the U.S. Facility are
available to fund future working capital and other corporate purposes. As of
March 1, 2005, we had advances of $13.1 million and we had eligible accounts
receivable sufficient to support $18.6 million in borrowings from our U.S.
Facility. This U.S. Facility also included a $5.0 million bridge loan facility
available to the Company at the rate of prime plus 2.00%. The Company borrowed
the full $5.0 million available for the bridge loan facility on August 24, 2004
and subsequently repaid the bridge loan facility by November 26, 2004. Under the
terms of our amended U.S. Facility, we are not permitted to make additional
acquisitions without the lender's consent. In addition, as a condition to the
payment of any earn-out payments for any of its U.S.-based operations, the
amended U.S. Facility requires that the Company maintain a 60 day average
undrawn availability of at least $2.5 million after taking effect for any such
earn-out payment.
Effective October 27, 2004, Stonepath Holdings (Hong Kong) Limited ("Asia
Holdings") entered into a $10.0 million term credit facility with Hong Kong
League Central Credit Union (the "Asia Facility") collateralized by the accounts
receivable of the Company's Hong Kong and Singapore operations and an unsecured
subordinated guarantee from Stonepath Group, Inc. The Asia Facility carries a
term of one year and an interest rate of 15.0% for amounts outstanding
thereunder. On November 4, 2004, Asia Holdings borrowed $3.0 million under the
Asia Facility.
Below are descriptions of material acquisitions made since 2001 including
a breakdown of consideration paid at closing and future potential earn-out
payments. We define "material acquisitions" as those with aggregate potential
consideration of $5.0 million or more.
On October 5, 2001, we acquired Air Plus, a group of Minneapolis-based
privately held companies that provide a full range of logistics and
transportation services. The total value of the transaction was $34.5 million,
consisting of cash of $17.5 million paid at closing and a four-year earn-out
arrangement of $17.0 million. In the earn-out, we agreed to pay the former Air
Plus shareholders installments of $3.0 million in 2003, $5.0 million in 2004,
$5.0 million in 2005 and $4.0 million in 2006, with each installment payable in
full if Air Plus achieves pre-tax income of $6.0 million in each of the years
preceding the year of payment. In the event there is a shortfall in pre-tax
income, the earn-out payment will be reduced on a dollar-for-dollar basis to the
extent of the shortfall. Shortfalls may be carried over or carried back to the
extent that pre-tax income in any other payout year exceeds the $6.0 million
level. Based upon restated financial results, the cumulative adjusted earnings
for Air Plus from date of acquisition through December 31, 2003 was $8.1 million
compared to the previously calculated amount of $12.7 million. As a result, the
Company believes that it has paid approximately $3.9 million to selling
shareholders in excess of amounts that should have been paid. As a consequence
of the restatements, the amounts paid in 2004 and 2003 in excess of earn-out
payments due were reclassified from goodwill to advances due from shareholders.
At December 31, 2004, the excess earn-out payments related to the 2003 and 2002
results of operations have been fully reserved for because of differing
interpretations, by the Company and selling shareholders, of the earn-out
provisions of the purchase agreement. However, the Company will seek the refund
of such excess payments.
On April 4, 2002, we acquired SLIS, a Seattle-based privately held company
which provides a full range of international air and ocean logistics services.
The transaction was valued
34
at up to $12.0 million, consisting of cash of $5.0 million paid at the closing
and up to an additional $7.0 million payable over a five-year earn-out period
based upon the future financial performance of SLIS. We agreed to pay the former
SLIS shareholders a total of $5.0 million in base earn-out payments payable in
installments of $0.8 million in 2003, $1.0 million in 2004 through 2007 and $0.2
million in 2008, with each installment payable in full if SLIS achieves pre-tax
income of $2.0 million in each of the years preceding the year of payment (or
the pro rata portion thereof in 2002 and 2007). In the event there is a
shortfall in pre-tax income, the earn-out payment will be reduced on a pro-rata
basis. Shortfalls may be carried over or carried back to the extent that pre-tax
income in any other payout year exceeds the $2.0 million level. We also provided
the former SLIS shareholders with an additional incentive to generate earnings
in excess of the base $2.0 million annual earnings target ("SLIS's tier-two
earn-out"). Under SLIS's tier-two earn-out, the former SLIS shareholders are
also entitled to receive 40% of the cumulative pre-tax earnings in excess of
$10.0 million generated during the five-year earn-out period subject to a
maximum additional earn-out opportunity of $2.0 million. SLIS would need to
generate cumulative earnings of $15.0 million over the five-year earn-out period
to receive the full $7.0 million in contingent earn-out payments. Based upon
2004 performance, the former SLIS shareholders will receive $1.0 million on
April 1, 2005. On a cumulative basis, SLIS has generated $13.5 million in
adjusted earnings, providing its former shareholders with a total of $2.8
million in cash earn-out payments and excess earnings of $8.0 million to
carryforward and apply to future earnings targets.
On May 30, 2002, we acquired United American, a Detroit-based privately
held provider of expedited transportation services. The United American
transaction provided us with a new time-definite service offering focused on the
automotive industry. The transaction was valued at up to $16.1 million,
consisting of cash of $5.1 million paid at closing and a four-year earn-out
arrangement based upon the future financial performance of United American. We
agreed to pay the former United American shareholder a total of $5.0 million in
base earn-out payments payable in installments of $1.25 million in 2003 through
2006, with each installment payable in full if United American achieves pre-tax
income of $2.2 million in each of the years preceding the year of payment. In
the event there is a shortfall in pre-tax income, the earn-out payment will be
reduced on a dollar-for-dollar basis to the extent of the shortfall. Shortfalls
may be carried over or carried back to the extent that pre-tax income in any
other payout year exceeds the $2.2 million level. The Company has also provided
the former United American shareholder with an additional incentive to generate
earnings in excess of the base $2.2 million annual earnings target ("United
American's tier-two earn-out"). Under United American's tier-two earn-out, the
former United American shareholder is also entitled to receive 50% of the
cumulative pre-tax earnings generated by a certain pre-acquisition customer in
excess of $8.8 million during the four-year earn-out period subject to a maximum
additional earn-out opportunity of $6.0 million. United American would need to
generate cumulative earnings of $20.8 million over the four-year earn-out period
to receive the full $11.0 million in contingent earn-out payments. Based upon
restated financial results, the cumulative adjusted earnings for United American
from the date of acquisition through December 31, 2003 was $1.7 million compared
to the previously calculated amount of $2.4 million. The Company believes that
it has paid approximately $0.5 million to the selling shareholder in excess of
amounts due. As a consequence of the restatements, the amounts paid in 2004 and
2003 in excess of earn-out payments due were reclassified from goodwill to
advances due from shareholders. At December 31, 2004, the excess earn-out
payment related to the 2003 and 2002 results of operations have been fully
reserved for because of differing interpretations, by the Company and the
selling shareholder, of the earn-out provisions of the purchase agreement.
However, the Company will seek the refund of such excess payment.
On June 20, 2003, through our indirect wholly owned subsidiary, Stonepath
Logistics Government Services, Inc. (f/k/a TSI) we acquired the business of
Regroup, a Virginia limited liability company. The Regroup transaction enhanced
our presence in the Washington, D.C. market and provided a platform to focus on
the logistics needs of U.S. government agencies and contractors. The transaction
was valued at up to $27.2 million, consisting of cash of $3.7 million and $1.0
million of Company stock paid at closing, and a five-year earn-out arrangement.
The Company agreed to pay the members of Regroup a total of $10.0 million in
base earn-out payments payable in equal installments of $2.5 million in 2005
through 2008, if Regroup achieves pre-tax income of $3.5 million in each of the
years preceding the year of payment. In the event there is a shortfall in
pre-tax income, the earn-out payment will be reduced on a dollar-for-dollar
basis. Shortfalls may be carried over or carried back to the extent that pre-tax
income in any other payout year exceeds the $3.5 million level. The Company also
agreed to pay the former members of Regroup an additional $2.5 million if
Regroup earned $3.5 million in pre-tax income during the 12-month period
commencing July 1, 2003, however no payment was required based on Regroup's
actual results. In addition, the Company has also provided the former members of
Regroup with an additional incentive to generate earnings in excess of the base
$3.5 million annual earnings target ("Regroup's tier-two earn-out"). Under
Regroup's tier-two earn-out, the former members of Regroup are also entitled to
receive 50% of the cumulative pre-tax earnings in excess of $17.5 million
generated during the five-year earn-out period subject to a maximum additional
earn-out
35
opportunity of $10.0 million. Regroup would need to generate cumulative earnings
of $37.5 million over the five-year earn-out period in order for the former
members to receive the full $22.5 million in contingent earn-out payments.
On August 8, 2003, through two indirect international subsidiaries, we
acquired a seventy (70%) percent interest in the assets and operations of the
Singapore and Cambodia based operations of the G-Link Group, which provide a
full range of international logistics services, including international air and
ocean transportation, to a worldwide customer base of manufacturers and
distributors. This transaction substantially increased our presence in Southeast
Asia and expanded our network of owned offices through which to deliver global
supply chain solutions. The transaction was valued at up to $6.2 million,
consisting of cash of $2.8 million, $0.9 million of the Company's common stock
paid at the closing and an additional $2.5 million payable over a four-year
earn-out period based upon the future financial performance of the acquired
operations. We agreed to pay $2.5 million in base earn-out payments payable in
installments of $0.3 million in 2004, $0.6 million in 2005 through 2006 and $1.0
million in 2007, with each installment payable in full if the acquired
operations achieve pre-tax income of $1.8 million in each of the years preceding
the year of payment (or the pro rata portion thereof in 2003 and 2006). In the
event there is a shortfall in pre-tax income, the earn-out payment will be
reduced on a dollar-for-dollar basis. Shortfalls may be carried over or carried
back to the extent that pre-tax income in any other payout year exceeds the $1.8
million level. As additional purchase price, the Company also agreed to pay
G-Link for excess net assets amounting to $1.5 million through the issuance of
Company common stock, on a post-closing basis. Based upon 2004 performance,
G-Link will be entitled to receive $0.5 million on April 1, 2005.
On February 9, 2004, through a wholly-owned subsidiary, we acquired a 55%
interest in Shanghai-based Shaanxi. Shaanxi provides a wide range of customized
transportation and logistics services and supply chain solutions. The
transaction was valued at up to $11.0 million, consisting of cash of $3.5
million and $2.0 million of the Company's common stock paid at the closing, plus
up to an additional $5.5 million payable over a five-year period based upon the
future financial performance of Shaanxi. The earn-out payments are due in five
installments of $1.1 million beginning in 2005, with each installment payable in
full if Shaanxi achieves pre-tax income of at least $4.0 million in each of the
earn-out years. In the event there is a shortfall in pre-tax income, the
earn-out payment for that year will be reduced on a dollar-for-dollar basis by
the amount of the shortfall. Shortfalls may be carried over or back to the
extent that pre-tax income in any other payout year exceeds the $4.0 million
level. As additional purchase price, on a post-closing basis the Company agreed
to pay Shaanxi for 55% of its closing date working capital, which amounted to
$1.9 million. On March 21, 2005, the Company and the selling shareholder entered
into a financial arrangement whereby the amount due became subject to a note
payable due March 31, 2006 with interest at 10% per annum. Based upon 2004
performance, the shareholder of Shaanxi will be entitled to receive $0.9 million
on April 1, 2005.
We may 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.
36
The following table summarizes our maximum possible contingent base
earn-out payments for the years indicated based on results of the prior year as
if pre-tax earnings targets associated with each acquisition were achieved
although the Company does not expect the Domestic Services pre-tax earnings
levels to be fully achieved (in thousands) (1)(2)(3):
2006 2007 2008 2009 Total
-------- -------- -------- -------- --------
Earn-out payments:
Domestic $ 8,050 $ 2,500 $ 2,500 $ -- $ 13,050
International 5,131 5,503 3,769 3,417 17,820
-------- -------- -------- -------- --------
Total earn-out payments $ 13,181 $ 8,003 $ 6,269 $ 3,417 $ 30,870
======== ======== ======== ======== ========
Prior year pre-tax earnings targets (3)
Domestic $ 12,306 $ 3,500 $ 3,500 $ -- $ 19,306
International 12,446 13,502 8,840 7,723 42,511
-------- -------- -------- -------- --------
Total pre-tax earnings targets $ 24,752 $ 17,002 $ 12,340 $ 7,723 $ 61,817
======== ======== ======== ======== ========
Domestic 65.4% 71.4% 71.4% -- 67.6%
International 41.2% 40.8% 42.6% 44.2% 41.9%
Combined 53.3% 47.1% 50.8% 44.2% 49.9%
- ----------
(1) Excludes the impact of prior year's pre-tax earnings carryforwards (excess
or shortfalls versus earnings targets).
(2) During the 2005-2008 earn-out period, there is an additional contingent
obligation related to tier-two earn-outs that could be as much as $18.0
million if certain of the acquired companies generate an incremental $37.0
million in pre-tax earnings.
(3) Aggregate pre-tax earnings targets as presented here identify the uniquely
defined earnings targets of each acquisition and should not be interpreted
to be the consolidated pre-tax earnings of the Company which would give
effect for, among other things, amortization or impairment of intangible
assets created in connection with each acquisition or various other
expenses which may not be charged to the operating groups for purposes of
calculating earn-outs.
The Company is a defendant in a number of legal proceedings. Although we
believe that the claims asserted in these proceedings are without merit, and we
intend to vigorously defend these matters, there is the possibility that the
Company could incur material expenses in the defense and resolution of these
matters. Furthermore, since the Company has not established any reserves in
connection with such claims, such liability, if any, 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 and cash flows in the period recorded.
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (revised), "Share-Based Payment" ("SFAS No. 123R"), which replaced
SFAS No. 123, "Accounting for Stock-Based Compensation", and superseded
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." SFAS No. 123R will require compensation cost related to
share-based payment transactions to be recognized in the financial statements.
As permitted by SFAS No. 123, we currently follow the guidance of APB No. 25,
which allows the use of the intrinsic value method of accounting to value
share-based payment transactions with employees. SFAS No. 123R requires
measurement of the cost of share-based payment transactions to employees at the
fair value of the award on the grant date and recognition of expense over the
requisite service or vesting period. SFAS No. 123R allows implementation using a
modified version of prospective application, under which compensation expense
for the unvested portion of previously granted awards and all new awards will be
recognized on or after the date of adoption. SFAS No. 123R also allows companies
to implement it by restating previously issued financial statements, basing the
amounts on the expense previously calculated and reported in their pro forma
footnote disclosures required under SFAS No. 123. We will adopt SFAS No. 123R
using the modified prospective method beginning July 1, 2005. The impact of
adopting SFAS No. 123R on our consolidated results of operations is not expected
to differ materially from the pro forma disclosures currently required by SFAS
No. 123 (see Note 2j to our consolidated financial statements).
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets." This statement addresses the fair value concepts contained in APB
Opinion No. 29, "Accounting for Nonmonetary Transactions", which included
certain exceptions to the concept that exchanges of similar productive assets
should be recorded at the carrying value
37
of the asset relinquished. SFAS No. 153 eliminates that exception and replaces
it with a general exception for exchanges of nonmonetary assets that lack
commercial substance. Only nonmonetary exchanges in which an entity's future
cash flows are expected to significantly change as a result of the exchange will
be considered to have commercial substance. SFAS No. 153 must be applied to
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005. Adoption of SFAS No. 153 is not expected to have a significant effect on
the Company's financial position, results of operations or cash flows.
The FASB issued two final FASB Staff Positions ("FSPs") addressing the
financial accounting for certain provisions of the American Jobs Creation Act of
2004 (the "Act"). A provision of the Act allows taxpayers a deduction equal to a
percentage of the lesser of the taxpayer's qualified domestic production
activities income or taxable income, subject to a limitation of 50% of annual
wages paid. FSP 109-1, "Application of FASB Statement No. 109, Accounting for
Income Taxes, to the Tax Deduction on Qualified Production Activities Provided
by the American Jobs Creation Act of 2004," addresses whether the qualified
domestic production activities should be treated as a special deduction or a
rate reduction under SFAS No. 109.
Additionally, another provision of the Act provides taxpayers a special,
one-time 85% dividend received deduction for certain foreign earnings that are
repatriated in either a company's first taxable year beginning on or after the
date of the Act's enactment or the last taxable year beginning before such date.
Some companies have requested that clarification be provided on certain aspects
of the repatriation provisions of the Act. Until these clarifications are made,
we are unable to conclude whether we will repatriate earnings or how much that
repatriation will be.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Currently, our exposure to foreign currency exchange risk is not
significant, although, as our international operations expand, that exposure
could increase. Our exposure to market risk relates primarily to changes in
interest rates and the resulting impact on our interest incurred and our cash
flows. We place our cash with high credit quality financial institutions and
invest that cash in money market funds and investment grade securities with
maturities of less than 90 days. We are averse to principal loss and ensure the
safety and preservation of our invested funds by investing in only highly rated
investments and by limiting our exposure in any one issuance. Our credit
facility bears interest at a variable rate. If market interest rates had changed
by 100 basis points, interest expense and our cash flows would have changed by
approximately $118,000 and $107,000, respectively. We do not invest in
derivative financial instruments.
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements as of December 31, 2004 and 2003 and
for each of the years in the three-year period ended December 31, 2004 and
footnotes related thereto are included within Item 15(a) of this report and may
be found at pages 63 through 98. Schedule II - Valuation and Qualifying
Accounts, may be found on page 100.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On June 17, 2004, the Company dismissed KPMG LLP ("KPMG") as the
Company's independent accountants. On June 24, 2004, the Company engaged Grant
Thornton LLP as its new independent accountants.
KPMG's audit reports on the Company's consolidated financial statements
for the years ended December 31, 2003 and 2002 did not contain an adverse
opinion or a disclaimer of opinion, nor were such reports qualified or modified
as to uncertainty, audit scope or accounting principles.
The decision to change accountants was made by Stonepath's Audit
Committee.
During the fiscal years ended December 31, 2003 and 2002, and the
subsequent interim period through the Company's change in independent
accountants, there were no disagreements with KPMG on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to KPMG's satisfaction, would
have caused KPMG to make reference to the subject matter of the disagreements in
connection with its report.
There were no reportable events (as defined in Regulation S-K, Item
304(a)(1)(v)) during the fiscal years ended December 31, 2003 and 2002 and the
subsequent interim period through the Company's change in independent
accountants, except for the reportable condition described in the first
paragraph of Item 9A of this Annual Report on Form 10-K.
Item 9A. Controls and Procedures
Overview
In January 2004, the Company restated its consolidated statements of
operations for the last three quarters of fiscal 2002, the first three quarters
of fiscal 2003, and for the year ended December 31, 2002, as a result of an
error discovered in the legacy accounting processes of SLIS. The Company
determined that a process error existed which resulted in the failure to
eliminate certain intercompany transactions in consolidation. This process error
was embedded in the legacy accounting process of SLIS Transportation Systems,
Inc. for a period which began substantially before its acquisition by the
Company in April 2002.
38
The Company believes that the presence of this error, in and of itself,
constituted a reportable condition as defined under standards established by the
American Institute of Certified Public Accountants. This significant deficiency
was addressed by correcting the process error that resulted in the failure to
eliminate intercompany transactions in consolidation. In addition, the Company
changed its organizational structure to require the senior financial
representatives within the International Services segment to report directly to
the Company's Chief Financial Officer.
In connection with the preparation of the Company's June 30, 2004
consolidated financial statements, the Company's management determined that
Stonepath Logistics Domestic Services, Inc. ("SLDS") did not follow the
Company's designed disclosure controls and procedures to report a potential
weakness in the methodology used by SLDS to estimate its accrued cost of
purchased transportation. Based on its initial analysis at that time, the
Company recorded an immaterial increase to SLDS' cost of transportation in the
second quarter of 2004. The Company's management believes that the failure of
SLDS to follow the designed disclosure and control procedures in and of itself
constitutes a material weakness as defined under standards established by the
Public Company Accounting Oversight Board (United States) ("PCAOB"). The Company
has implemented changes in its estimating procedures and its processes for
recognizing differences between actual and estimated costs to assure the proper
recognition of purchased transportation costs. To address this material
weakness, the Company initiated an immediate change in process at its Domestic
Services segment to reduce the likelihood that a similar error could occur in
the future. In addition, the Company changed its organizational structure to
require the senior financial representatives within the Domestic Services
segment to report directly to the Company's Chief Financial Officer.
On September 20, 2004, the Company announced, after having performed some
additional analysis, that it had understated its accrued purchase transportation
liability and related cost of purchased transportation for previously reported
periods as a result of an error discovered in the accounting processes within
certain subsidiary operations of the Domestic Services segment. The Company
determined that the process error did not accurately account for the differences
between the estimates and the actual freight costs incurred. This allowed for an
accumulation of previously unrecorded purchased transportation costs to build up
(such amounts should have been reflected as purchased transportation costs). In
addition, the error resulted in the Company making earn-out payments to selling
shareholders in amounts greater than what otherwise would have been owed. The
Company believes that the presence of this error is indicative of a material
weakness in internal controls as defined under standards established by the
PCAOB. To address this material weakness, the Company has altered its methods to
recognize the difference between actual costs of transportation and estimates
for such costs on a timely basis and will modify its operating systems to
provide for the recording of purchased transportation costs at the time an order
is entered.
In the course of its review of the process error related to the under
accrual of purchased transportation, the Company also identified two additional
process errors related to revenue transactions within the Domestic Services
segment. At its Detroit location, the Company identified a billing error in
which the operating unit was invoicing one of its automotive customers at rates
which had been approved by a customer representative who did not have the
authority to do so. This customer billing error caused the Company to overstate
its revenues. At its Minneapolis location, the Company identified an accounting
error related to revenue recognition and depreciation that originated during the
second quarter of 2004. Upon billing to a customer for certain capital equipment
purchased in connection with the launch of a new distribution center for that
customer, the unit recognized the revenue immediately rather than over the
two-year life of the contract and had depreciated the capital equipment over its
useful life rather than matching it to the life of the contract. The Company
believes that the presence of the billing error and the accounting error in the
aggregate constitute a material weakness as defined under standards established
by the PCAOB. The Company has addressed the material weakness by advising
management of each unit in question on the proper treatment of these and similar
transactions in the future.
The Company has restated its consolidated financial statements for the
first two quarters of 2004, and for the years ended December 31, 2003, 2002 and
2001 to correct the processing errors related to its purchased transportation
accrual, the customer billings issue, and to reflect the related income tax
effects. In addition, the amounts owed as of December 31, 2003 and 2002 under
various earn-out provisions have been changed to reflect the impact of the
restatement.
A material weakness is a significant deficiency, or combination of
significant deficiencies, that results in more than a remote likelihood that a
material misstatement of the annual or interim financial statements will not be
prevented or detected. A significant deficiency is a control deficiency, or
combination of control deficiencies that
39
adversely affects the Company's ability to initiate, record, process and report
financial data consistent with the assertions of management in the financial
statements.
Disclosure Controls and Procedures
As of December 31, 2004, the Company carried out an evaluation of the
effectiveness of the Company's disclosure controls and procedures. This
evaluation was carried out under the supervision and with the participation of
the Company's management, including the Chief Executive Officer and Chief
Financial Officer. The Company's disclosure controls and procedures are designed
to ensure the information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported on a timely basis.
Based on that evaluation, taking into account the significant
deficiencies, material weaknesses and remedial actions described above, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that the Company's disclosure controls and procedures were effective as of
December 31, 2004.
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate
internal control over financial reporting for the Company. The Company's
internal control over financial reporting is a process designed under the
supervision of the Company's Chief Executive Officer and Chief Financial Officer
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of the Company's consolidated financial statements for
external reporting purposes in accordance with the U.S. generally accepted
accounting principles. Management, together with independent consultants, has
made a comprehensive review, evaluation and assessment of the Company's internal
control over financial reporting as of December 31, 2004. In making its
assessment of internal control over financial reporting, management used the
criteria issued by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO") in "Internal Control - Integrated Framework." In accordance
with Section 404 of the Sarbanes-Oxley Act of 2002, management has made the
following assessment:
o Disparate operating systems impacting the design and operating
effectiveness of internal control over financial reporting require
rationalization, modification, documentation and remediation of
internal control weaknesses
o Operating and financial systems, including program change controls,
impacting the design and operating effectiveness of internal control
over financial reporting require rationalization, modification,
documentation and remediation of internal control weaknesses.
o Financial policies and procedures impacting the design and operating
effectiveness of internal control over financial reporting require
rationalization, modification, documentation and remediation of
internal control weaknesses.
40
o The Company had inadequate controls related to its assessment of the
effectiveness of the Company's internal control over financial
reporting. Management was not able to complete their assessment in a
timely manner and completed their assessment on February 11, 2005,
which did not allow adequate time for the external auditors to
complete their audit of management's report on the effectiveness of
the Company's internal control over financial reporting.
o The Company had inadequate controls related to its consolidation
process. The Company's consolidation process is a manual process
performed by individuals with the ability to initiate and record
adjustments within the consolidation. Certain reporting subsidiaries
maintain two general ledger applications which creates the potential
for errors as a result of entering information twice. The Company
has a large number of entities and a large number of different
applications. The Company's process for the consolidation of
accounting information from this number of entities and applications
is error prone. In addition, the corporate office has the ability to
make adjustments to the consolidation without any documented level
of approval.
o The Company had inadequate controls related to the accounting for
purchased transportation. The Company's public filings for fiscal
years 2003 and 2002, and for the first and second quarters of fiscal
year 2004 have been restated due to control deficiencies related to
the accrued purchased transportation. The process for accounting for
accrued purchased transportation did not accurately account for the
differences between the estimates and the actual freight costs
incurred. This allowed for an accumulation of previously unrecorded
purchased transportation costs to accumulate (such amounts should
have been reflected as purchased transportation costs). In addition,
the error resulted in the Company making earn-out payments to
selling shareholders in amounts greater than what otherwise would
have been owed.
o The Company had inadequate controls related to the approval of
contracts, and initiating and approving adjustments related to
claims. A key member of management of a Company subsidiary was
responsible for initiating and approving contracts. This individual
also had the ability to initiate and approve the recording of
related transactions to contracts. We noted that this individual was
responsible for establishing policies and procedures, establishing
limits of authority, and approving customers.
o The Company had inadequate controls related to application access
rights at its International Services subsidiary. Various employees
have access to numerous application programs that are outside of the
employees' job requirements. For example, of the 82 employees of the
subsidiary, 34 have the ability to add, delete, or modify vendors
and 27 employees have the ability to issue checks. Of the 60 users
who have the ability to initiate a payment, 28 are authorized
signatories with the bank. In addition, all users have access to
enter payment information into the accounts payable subsystem
regardless of job responsibility.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. These control deficiencies identified above resulted in the need to
restate the Company's consolidated financial statements as described above.
Accordingly, management has determined that these conditions constitute a
material weakness. Because of this material weakness, we have concluded that the
Company did not maintain effective internal control over financial reporting as
of December 31, 2004 based on the criteria in the "Internal Control - Integrated
Framework."
Management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004 has been audited by
Grant Thornton LLP, an independent registered public accounting firm, as stated
in their report (which disclaimed an opinion on management's assessment and on
the effectiveness of the Company's internal control over financial reporting as
of December 31, 2004) which appears on pages 63 to 65.
41
Changes in Internal Control over Financial Reporting
Management of the Company has evaluated, with the participation of the
Company's Chief Executive Officer and Chief Financial Officer, changes in the
Company's internal control over financial reporting (as defined in Rule
13a-15(f) and 15d-15(f) of the Exchange Act) during the fourth quarter of 2004
that have materially affected or are reasonably likely to materially affect, the
Company's internal control over financial reporting. As discussed in
Management's Report on Internal Control Over Financial Reporting, in the fourth
quarter of 2004, the Company identified material weaknesses in internal control
over financial reporting in the Company's information systems and financial
policies and procedures.
As of the end of the period covered by this report, the Company has not
fully remediated the material weaknesses in the Company's internal control over
financial reporting. However, the Company has taken the following remedial
actions:
o Corporate systems and financial leadership is being replaced;
o Consolidation and integration of all financial and systems personnel
within the United States is in process of implementation;
o Policies and procedural definitions and, in certain instances,
changes resulting from the Chief Executive Officer's and the Chief
Financial Officer's evaluation of internal control over financial
reporting are in various stages of being developed, documented and
implemented; and
o An ongoing self evaluation system of internal control over financial
reporting and disclosures is being developed.
Other than the changes identified above, there have been no changes to the
Company's internal control over financial reporting that occurred since the
beginning of the Company's fourth quarter of 2004 that have materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS OF
STONEPATH GROUP, INC.
The following is the report of the Audit Committee for the year ended
December 31, 2004. The Audit Committee is composed of three directors, each of
whom meets the American Stock Exchange's independence standards. The Audit
Committee had historically operated under a written charter adopted by the Board
of Directors in 2000. At a meeting held on March 25, 2003, the Board of
Directors adopted a new written charter for the Audit Committee. On January 28,
2004 the Board of Directors amended such written charter for the Audit
Committee. The Audit Committee as a whole meets regularly with the Company's
management and independent auditors to discuss the adequacy of the Company's
internal control environment and financial reporting, accounting matters, audit
results and compliance with its corporate responsibility program.
In carrying out its responsibilities and fulfilling obligations under its
charter, the Audit Committee, among other things:
o reviewed with the independent auditors their audit plan audit scope,
and identified audit risks;
o discussed with the independent auditors matters required to be
discussed by Statement on Auditing Standards No. 61, "Communications
with Audit Committees," as modified or supplemented, including,
among other items, matters related to the conduct of the audit of
the Company's consolidated financial statements;
o obtained from the independent auditors a written statement
describing all relationships between the independent auditors and
the Company that might bear on the auditors' independence,
consistent with Independence Standards Board Standard No. 1,
"Independence Discussions with Audit Committees";
42
o discussed with the independent auditors any relationships that may
impact their objectivity and independence, and generally satisfied
itself that the auditors are independent;
o reviewed and discussed the Company's audited consolidated financial
statements for the year ended December 31, 2004 with management and
the independent auditors;
o obtained from management the representation that the Company's
consolidated financial statements were prepared in conformity with
accounting principles generally accepted in the United States of
America; and
o discussed with management and the independent auditors the quality
and adequacy of the Company's internal controls.
Based on its review, analysis and discussions with management and the
independent auditors, the Audit Committee recommended to the Company's Board of
Directors (and the Board approved) that the Company's audited consolidated
financial statements for the three years ended December 31, 2004 be included in
the Company's Annual Report on Form 10-K for the year ended December 31, 2004.
The Audit Committee and the Board have also recommended, subject to shareholder
ratification, the selection of the Company's independent auditors for 2005.
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
David R. Jones, Chairman
Aloysius T. Lawn, IV
Robert McCord
Item 9B. Other Information
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Our directors and executive officers as of February 28, 2005 were as
follows:
Name Age Position
- ---- --- --------
Dennis L. Pelino 57 Chairman of the Board of Directors
Jason F. Totah 45 Chief Executive Officer
Robert Arovas 61 President
Thomas L. Scully 55 Chief Financial Officer, Vice President, Secretary, Treasurer and Controller
J. Douglass Coates 62 Director
John H. Springer (2) 48 Director
David R. Jones (1)(2) 56 Director
Aloysius T. Lawn, IV (1)(2) 46 Director
Robert McCord (1) 46 Director
- ----------
(1) Member of Audit Committee
(2) Member of Compensation Committee
The following is a brief summary of the business experience of the
foregoing directors and executive officers.
Dennis L. Pelino has served as our Chairman of the Board of Directors
since June 21, 2001 and was also our Chief Executive Officer from that date
until October 2004. Mr. Pelino has over two decades of executive experience in
the logistics industry. From 1986 to 1999, he was employed by Fritz Companies,
Inc., initially as director of International Operations and Sales and Marketing,
in 1993 as its Chief Operating Officer and commencing in 1996, also as its
President. Mr. Pelino was also a member of the Board of Directors of Fritz
43
Companies from 1991 to 1999. During Mr. Pelino's tenure, he acquired or started
over 50 companies for Fritz as it became one of the leading global logistics
companies. Prior to Fritz, Mr. Pelino held senior executive positions in the
container shipping industry and in the domestic full-service truck leasing
industry. From 1999 through 2001, Mr. Pelino was involved as a director and
principal of a number of private ventures which explored opportunities in the
logistics industry and which provided consulting services relative to business
opportunities in Latin America, China and other Far Eastern regions.
Jason F. Totah has served as our Chief Executive Officer since October
2004. Prior to then, he was the Chief Executive Officer of Stonepath Logistics
International Services, Inc. (f/k/a Global Transportation Services, Inc.,
"Global"). Mr. Totah joined Global in 1990 and has held several positions
including Seattle branch manager and Senior Vice President, Sales and Marketing,
and Senior Vice President of Sales and Operations. Prior to joining Global, he
worked in international logistics for Amoco Petroleum, stationed in various
locations around the world. He graduated from Oregon State in 1983 with a degree
in Agriculture Engineering.
Robert Arovas has served as our President since October 2004. From June
1999 to July 2002, Mr. Arovas was the President and Chief Executive Officer of
Geologistics Corporation, a privately held global logistics provider. Prior to
that, Mr. Arovas was the Executive Vice President, Chief Financial Officer of
Fritz Companies from 1997 to 1999. Earlier in his career, Mr. Arovas held
executive positions at various companies, including The Pittston Company and
Burlington Air Express and has a background in public accounting. Since 2002,
Mr. Arovas has been on the board of directors of a privately held company,
provided consulting services and served as part of an acquisition group in the
logistics area, among other activities.
Thomas L. Scully has served as our Vice President and Controller since
November 19, 2001, as our Chief Financial Officer since November 2004, and as
our Treasurer and Secretary since January 2005. Before joining Stonepath, Mr.
Scully was a senior manager within the assurance and advisory services of
Deloitte & Touche, LLP ("Deloitte & Touche") from December 1996 to November
2001. Prior to Deloitte & Touche, from October 1980 to June 1996, Mr. Scully was
an audit partner at BDO Seidman, LLP ("BDO") where he led numerous accounting,
auditing and tax engagements for publicly traded and privately-held local,
national, and international clients. Prior to BDO, he held the position of audit
supervisor at Coopers & Lybrand, LLP. Mr. Scully is a certified public
accountant and earned a B.S. in Accounting from St. Joseph's University,
Philadelphia.
J. Douglass Coates has served as a member of our Board of Directors since
August 2001. He has been a principal of Manalytics International, Inc., a
transportation, logistics and supply chain consulting firm based in San
Francisco, California, since 1992. He was previously President of ACS Logistics,
a division of American President Lines, and President of Milne Truck Lines, then
a subsidiary of the Sun Company. Mr. Coates holds a B.S. in Engineering from
Pennsylvania State University and an MBA from the Wharton School of the
University of Pennsylvania.
John H. Springer has served as a member of our Board of Directors since
May 2003. Mr. Springer has extensive global supply chain management and
logistics experience, having held both domestic U.S. and international logistics
positions at IBM Corporation, Union Pacific Corporation's third party logistics
unit, and at Dell Computer from 1995 to 2002. Mr. Springer joined Nike Inc. in
2002 and is its Director of Global Operations - Nike Golf. Mr. Springer has been
active in the Council of Logistics Management throughout his career, including
holding the position of President for the Central Texas region. He earned his
B.S. at Syracuse University in Transportation & Distribution Management, and his
MBA from St. Edwards University in Austin, Texas.
David R. Jones has served as a member of our Board of Directors since
September 2000. Mr. Jones has been President of DR Jones Financial, Inc., a
privately-held consulting firm since its formation in September 1995. He is
presently a director of Financial Asset Securities Corporation, an affiliate of
Greenwich Capital Markets, Inc. Prior to forming DR Jones Financial, Inc., Mr.
Jones was Senior Vice President-Asset Backed Finance of Greenwich Capital
Markets, Inc. from 1989 to 1995. Mr. Jones served as a Vice President, and
subsequently as a Managing Director of The First Boston Corporation, an
investment banking firm, from 1982 to 1989 and as Manager-Product Development of
General Electric Credit Corp., an asset-based lender and financial services
company, from 1981 to 1982. Mr. Jones is a graduate of Harvard College and has
an MBA from the Amos Tuck School of Business Administration.
Aloysius T. Lawn, IV has served as a member of our Board of Directors
since February 2001. Mr. Lawn is the Executive Vice President - General Counsel
and Secretary of Talk America Holdings, Inc., an integrated
44
communications service provider with programs designed to benefit the
residential and small business markets. Prior to joining Talk America Holdings,
Inc. in 1996, Mr. Lawn was an attorney in private practice with extensive
experience in private and public financings, mergers and acquisitions,
securities regulation and corporate governance from 1985 through 1995. Mr. Lawn
graduated from Yale University and Temple University School of Law.
Robert McCord has served as a member of our Board of Directors since March
2001. He is also a Managing Director of PA Early Stage, an affiliated fund of
Safeguard Scientifics, Inc. At PA Early Stage, which he co-founded in 1997, Mr.
McCord specializes in business development for their portfolio companies. He
also serves as President and Chief Executive Officer of the Eastern Technology
Council, a consortium of more than 1,200 technology-oriented companies. At the
Technology Council he provides contacts, capital and information for senior
executives. Mr. McCord co-founded and also serves as a principal of the Eastern
Technology Fund, which provides seed and early-stage funding for technology
companies in the eastern corridor. Previously, he served as Vice President of
Safeguard Scientifics, Inc., a leader in identifying, developing and operating
premier technology companies. Before joining Safeguard, Mr. McCord spent a
decade on Capitol Hill where he served as Chief of Staff, Speechwriter and
Budget Analyst in a variety of congressional offices. He specialized in budget
and deregulatory issues and, as Chief Executive Officer of the bipartisan
Congressional Institute for the Future, he ran a staff which tracked legislation
and provided policy analyses and briefings. Mr. McCord earned his B.S., with
high honors, from Harvard University and his MBA from the Wharton School of the
University of Pennsylvania.
Code of Ethics
Our Board of Directors has adopted a Code of Ethics applicable to all of
our employees, including our Chief Executive Officer and Chief Financial
Officer, Principal Accounting Officer and Controller. A copy of our Code of
Ethics is attached as an exhibit to this Annual Report on Form 10-K. We intend
to provide any disclosures which are required by the rules of the Securities and
Exchange Commission, or which we otherwise determine to be appropriate, with
respect to amendments of, and waivers from, our Code of Ethics by posting such
disclosures on our Internet website, www.stonepath.com.
Compliance with Section 16(a) of the Securities Exchange Act
Based solely on our review of copies of forms filed pursuant to Section
16(a) of the Securities Exchange Act of 1934, as amended, and written
representations from certain reporting persons, we believe that during 2004 all
reporting persons timely complied with all filing requirements applicable to
them.
Audit Committee Financial Expert
The Audit Committee of our Board of Directors is responsible for
monitoring the integrity of the Company's consolidated financial statements and
reporting processes and systems of internal control regarding finance,
accounting, and legal compliance and approving the engagement of its independent
auditors. The members of the Audit Committee are David R. Jones, Chairman, as
well as Aloysius T. Lawn, IV, and Robert McCord. The Board has determined that
Mr. Jones is independent and qualifies as an "audit committee financial expert"
as defined in the rules of the Securities and Exchange Commission by virtue of
his education and experience in complex financial matters and the analysis and
review of financial statements and has designated Mr. Jones as the "audit
committee financial expert."
45
Item 11. Executive Compensation
The following table sets forth a summary of the compensation paid or
accrued for the three fiscal years ended December 31, 2004 to or for the benefit
of our Chief Executive Officer and our four most highly compensated executive
officers whose total annual salary and bonus compensation exceeded $100,000 (the
"Named Executive Officers").
Summary Compensation Table
Long-Term
Annual Compensation Compensation Awards
----------------------- ----------------------------
Restricted Number of All Other
Name and Principal Position Salary Bonus Stock Awards Options Compensation(1)
- ------------------------------------- --------- --------- ------------ ------------- ---------------
Dennis L. Pelino, Chairman 2004 $ 360,000 -- -- 1,034,600(2) --
2003 $ 360,000 -- -- 700,000(3) --
2002 $ 360,000 -- -- 1,900,000(4) --
Jason F. Totah, Chief 2004 $ 325,476 $ 150,000 -- 493,100(5) --
Executive Officer 2003 $ 259,436 $ 150,000 -- -- --
2002 $ 187,500 $ 131,250 -- 250,000(6) --
Thomas L. Scully, Vice President, 2004 $ 116,750 -- -- 56,000(7) --
Chief Financial Officer, Controller, 2003 $ 105,000 $ 5,000 -- 33,300(8) --
Secretary and Treasurer 2002 $ 105,000 $ 12,500 -- 25,000(9) --
Bohn H. Crain, former Chief Financial
Officer and Treasurer 2004 $ 210,000 -- -- 423,300(10) --
2003 $ 200,000 -- -- 325,000(11) --
2002 $ 200,000 $ 37,500 -- 350,000(12) $44,000
Gary Koch, former Chief Executive
Officer of Stonepath Logistics
Domestic Services, Inc. 2004 $ 194,228 -- -- 150,000(13) --
2003 $ 270,509 -- -- -- --
2002 $ 264,497 -- -- -- --
- ----------
(1) During the periods reflected, certain of the officers named in this table
received perquisites and other personal benefits not reflected in the
amounts of their respective annual salaries or bonuses. The dollar amount
of these benefits did not, for any individual in any year, exceed the
lesser of $50,000 or 10% of the total annual salary and bonus reported for
that individual in any year, unless otherwise noted.
(2) The first grant of 550,000 options occurred on January 23, 2004, of which
183,334 options vested immediately, 183,333 options vested on the first
anniversary of the award date and 183,333 options vest on the second
anniversary of the award date. The second grant of 125,600 options
occurred on February 16, 2004 and vested immediately. The third grant of
359,000 options occurred on March 11, 2004 and vest pro rata on a monthly
basis commencing on March 31, 2004 through June 30, 2009.
(3) These options were granted on March 10, 2003. The first grant of 300,000
options vested immediately. The second grant of 400,000 options vest to
the extent of 133,334 on the first anniversary date of the award date and
to the extent of 133,333 on the second and third anniversaries of the
award date.
(4) These options were granted on July 3, 2002 and vested to the extent of
633,334 on the first anniversary of the award date and to the extent of
633,333 on the second and third anniversaries of the award date.
(5) The first grant of 80,000 options occurred on January 9, 2004, of which
26,667 options vested immediately, 26,667 options vested on the first
anniversary of the award date and 26,666 options vest on the second
anniversary of the award date. The second grant of 13,100 options occurred
on February 26, 2004 and vested immediately. The third grant of 400,000
options occurred on October 13, 2004, of which 133,333 vested on October
14, 2004, 66,667 options vest annually on October 14, 2005, 2006 and 2007
and 66,666 vest on October 14, 2008,
(6) The first grant of 200,000 options occurred on April 4, 2002 and second
grant of 50,000 options occurred on September 5, 2002. One-fourth of each
of these options vest on each of the first four anniversaries after the
grant date, subject to continued employment with the Company through each
vesting date.
(7) The first grant of 25,000 options occurred on January 9, 2004, of which
8,334 options vested immediately, 8,333 options vested on the first
anniversary of the award date and 8,333 options vest on the second
anniversary of the award date. The second grant of 6,000 options occurred
on February 26, 2004 and vested immediately. The third grant of 25,000
options occurred on May 21, 2004 of which 8,334 options vested immediately
on the first anniversary of the award date and 8,333 options vest on the
second and third anniversaries of the award date.
(8) The first grant of 8,300 options occurred on March 25, 2003, of which
2,767 vested immediately with the remainder vesting pro rata over the next
24 months.
(9) These options were granted on September 5, 2002 and vest to the extent of
6,250 options on the first, second, third and fourth anniversaries of the
award date.
(10) The first grant of 100,000 options occurred on January 9, 2004 of which
33,333 options vested immediately, 33,334 options vest on January 9, 2005
and 33,333 options vest on January 9, 2006. The second grant of 23,300
options occurred on February 26, 2004 and vested immediately. The third
grant of 300,000 options occurred on May 26, 2004 and vest to the extent
of 100,000 options on each of the first, second and third anniversary of
the award date.
(11) The first grant of 200,000 options occurred on February 24, 2003. The
second grant of 25,000 options occurred on March 25, 2003. The third grant
of 100,000 occurred on September 5, 2003. All of these options are vested.
(12) The first grant of 150,000 options occurred on January 10, 2002. The
second grant of 200,000 options occurred on July 3, 2002. All of these
options are vested.
46
(13) These options were granted on January 9, 2004, of which 50,000 options
vested immediately, 50,000 options vested on the first anniversary of the
award date and 50,000 options vest on the second anniversary of the award
date.
Employment Agreements
On March 10, 2004, effective as of January 1, 2004, we entered into an
amended employment agreement with our Chairman, Dennis L. Pelino. This agreement
amended our prior agreements with Mr. Pelino dated February 22, 2002 and June
21, 2001. Pursuant to this amendment, we agreed to extend the term of employment
of Mr. Pelino through June 2009. The amendment also increased the annual
compensation payable to Mr. Pelino by granting him, in addition to his current
base salary of $360,000, options to purchase 359,000 shares of our common stock
which vest in equal installments over the term of his employment. This grant of
options was intended to provide Mr. Pelino with incremental compensation of
$700,000 over the term of his employment. In addition to his base salary, Mr.
Pelino is entitled to bonus compensation based upon the achievement of certain
target objectives, as well as discretionary merit bonuses that can be awarded at
the discretion of our Board of Directors. Mr. Pelino is also entitled to certain
severance benefits upon his death, disability or termination of employment.
Pursuant to the employment agreement, Mr. Pelino is also entitled to fringe
benefits including participation in pension, profit sharing and bonus plans, as
applicable, and life insurance, hospitalization, major medical, paid vacation
and expense reimbursement.
In connection with our acquisition of Stonepath Logistics International
Services, Inc. we entered into an employment agreement with Jason F. Totah, then
the President and Chief Executive Officer of that subsidiary and the current
Chief Executive Officer of the Company. On April 1, 2004, we amended Mr. Totah's
employment agreement to extend the term of his employment until April 1, 2009.
Mr. Totah's employment agreement provides him with the right to a base annual
salary of no less than $250,000, subject to minimum annual cost-of-living
increases of five percent, subject to the approval of the Board of Directors.
Mr. Totah is entitled to an annual performance bonus at the discretion of the
Board of Directors. Mr. Totah is also entitled to certain severance benefits
upon his death, disability or termination of employment. Pursuant to the
employment agreement, Mr. Totah is also entitled to fringe benefits including
participation in pension, profit sharing and bonus plans, as applicable, and
life insurance, hospitalization major medical, paid vacation and expense
reimbursement.
On February 3, 2005, we entered into an employment agreement with our
President, Robert Arovas providing for an employment term of five years ending
on October 14, 2009. It provides Mr. Arovas with the right to an annual salary
of $250,000 (which may be increased or decreased by our Board of Directors, but
not to an amount less than $250,000), annual bonuses at our discretion, and
options to purchase 200,000 shares of our common stock. Mr. Arovas is also
entitled to certain severance benefits upon his death, disability or termination
of employment. Pursuant to the employment agreement, Mr. Arovas is also entitled
to fringe benefits including participation in pension, profit sharing and bonus
plans, as applicable, and life insurance, hospitalization, major medical, paid
vacation and expense reimbursement.
On November 12, 2004, the Company entered into a letter agreement with its
then Chief Financial Officer, Bohn Crain (the "Agreement"). The Agreement
provided for the continuation of his role as Chief Financial Officer of the
Company until December 31, 2004 or such earlier date requested by the Company.
It also provided for his continuing service as a consultant to the Company
during 2005. Under the terms of the Agreement, Mr. Crain was entitled to receive
his current base salary through December 31, 2004. During 2005, Mr. Crain is
entitled to receive monthly payments in the amount of $75,250 for each of
January and February and then monthly payments of $30,100 for the remainder of
the year.
Change in Control Arrangements
Our Chairman and our President are each employed under agreements that
contain change in control arrangements. If employment of any of these officers
is terminated following a change in control (other than for cause), then we must
pay such terminated employee a termination payment equal to 2.99 times his
salary and bonus, based upon the average annual bonus paid to him prior to
termination of his employment. In addition, all of their unvested stock options
shall immediately vest as of the termination date of their employment due to a
change in control. In each of their agreements, a change in control is generally
defined as the occurrence of any one of the following:
47
o any "Person" (as the term "Person" is used in Section 13(d) and
Section 14(d) of the Securities Exchange Act of 1934), except for
the affected employee, becoming the beneficial owner, directly or
indirectly, of our securities representing 50% or more of the
combined voting power of our then outstanding securities;
o a contested proxy solicitation of our stockholders that results in
the contesting party obtaining the ability to vote securities
representing 50% or more of the combined voting power of our
then-outstanding securities;
o a sale, exchange, transfer or other disposition of 50% or more in
value of our assets to another Person or entity, except to an entity
controlled directly or indirectly by us;
o a merger, consolidation or other reorganization involving us in
which we are not the surviving entity and in which our stockholders
prior to the transaction continue to own less than 50% of the
outstanding securities of the acquirer immediately following the
transaction, or if a plan involving our liquidation or dissolution
other than pursuant to bankruptcy or insolvency laws is adopted; or
o during any period of twelve consecutive months, individuals who at
the beginning of such period constituted the Board of Directors
cease for any reason to constitute at least a majority of the Board
of Directors unless the election, or the nomination for election by
our stockholders, of each new director was approved by a vote of at
least a majority of the directors then still in office who were
directors at the beginning of the period.
Under Mr. Arovas' employment agreement, a change of control would also occur if
Dennis L. Pelino is no longer the Chairman of the Company and his direct
superior.
Notwithstanding the foregoing, a "change of control" is not deemed to have
occurred (i) in the event of a sale, exchange, transfer or other disposition of
substantially all of our assets to, or a merger, consolidation or other
reorganization involving, any entity in which the affected employee has,
directly or indirectly, at least a 25% equity or ownership interest; or (ii) in
a transaction otherwise commonly referred to as a "management leveraged
buy-out."
In addition, the existing stock options granted to these executive
officers fully vest upon a "change in control," as defined within our Stock
Incentive Plan.
Directors Compensation
Non-employee directors are paid $3,750 per quarter, provided that each
member attends 75% of all meetings. In addition, a quarterly fee of $3,750 is
paid to the chairman of the Audit and Compensation Committees. Upon joining our
Board of Directors, each of our non-employee directors received an option to
purchase 50,000 shares of our common stock with an exercise price equal to the
closing price of our common stock on the trading day prior to the date of grant.
One-half of these options vested on the first anniversary of the director's
membership on the Board, and the balance vest on the second anniversary of Board
membership. On November 5, 2002 each member of our Audit Committee received
options to purchase 15,000 shares of our common stock at an exercise price of
$1.45 per share (of which 50% vested on November 5, 2003 and the balance vested
on November 5, 2004). In addition, on January 23, 2004, the chairmen of each of
our Audit Committee and Compensation Committee received options to purchase
25,000 shares of our common stock at an exercise price of $3.05 per share (of
which 50% vested on January 23, 2005 and the balance vest on January 23, 2006,
contingent upon continued Board service).
48
Stock Options and Warrants
The following table sets forth information on option grants in fiscal 2004
to the Named Executive Officers.
Option Grants in Last Fiscal Year
Potential Realizable
Value at
Assumed Annual Rates of
Stock Price Appreciation
for Option Term
% of Total ------------------------
Options
Granted to
Number of Employees Market Price
Options in Exercise on Date of Expiration
Name Granted Fiscal-Year Price Grant Date 5% 10%
- ---------------- ---------- ----------- -------- ------------ ------------- ---------- ----------
Dennis L. Pelino 550,000 15.32% $ 3.05 $ 3.05 January 2014 $1,054,971 $2,673,503
Dennis L. Pelino 125,600 3.50 3.38 3.38 February 2014 266,983 676,588
Dennis L. Pelino 359,000 10.00 3.75 3.75 March 2014 846,649 2,145,576
Jason F. Totah 80,000 2.23 2.38 2.38 January 2014 119,742 303,449
Jason F. Totah 13,100 0.36 3.38 3.38 February 2014 27,846 70,568
Jason F. Totah 400,000 11.14 0.75 0.75 October 2014 188,668 478,123
Thomas L. Scully 25,000 0.70 2.38 2.38 January 2014 37,419 94,828
Thomas L. Scully 6,000 0.17 3.38 3.38 February 2014 12,754 32,321
Thomas L. Scully 25,000 0.70 2.18 2.18 May 2014 34,275 86,859
Bohn H. Crain 100,000 2.79 2.38 2.38 January 2014 149,677 379,311
Bohn H. Crain 23,300 0.65 3.38 3.38 February 2014 49,528 125,514
Bohn H. Crain 300,000 8.36 2.37 2.37 May 2014 447,144 1,133,151
Gary A. Koch 150,000 4.18 2.38 2.38 January 2014 224,515 568,966
The following table sets forth information concerning year-end option
values for fiscal 2004 for the Named Executive Officers. The value of the
options was based on the closing price of our common stock on December 31, 2004
of $1.20.
Fiscal Year End Option Values
Number of Unexercised Options Value of Unexercised In-The-Money
at Fiscal Year End Options at Fiscal Year End
------------------------------------- -----------------------------------------
Shares
Acquired on Value
Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
----------- ---------- ----------- ------------- ----------- -------------
Dennis L. Pelino -- -- 3,865,029 1,569,571 $ 684,000 $ --
Jason F. Totah -- -- 348,100 395,000 60,000 120,000
Thomas L. Scully 6,900 15,699 60,875 71,525 -- --
Bohn H. Crain -- -- 1,098,300 -- -- --
Gary A. Koch -- -- -- -- -- --
Outstanding Stock Options
The Amended and Restated Stonepath Group, Inc. 2000 Stock Incentive Plan,
(the "Stock Incentive Plan") covers 15,000,000 shares of common stock. Under its
terms, employees, officers and directors of the Company and its subsidiaries are
currently eligible to receive non-qualified stock options, restricted stock
awards and incentive stock options within the meaning of Section 422 of the
Code. In addition, advisors and consultants who perform services for the Company
or its subsidiaries are eligible to receive non-qualified stock options under
the Stock Incentive Plan. The Stock Incentive Plan is administered by the Board
of Directors or a committee designated by the Board of Directors.
All stock options granted under the Stock Incentive Plan are exercisable
for a period of up to ten years from the date of grant. The Company may not
grant incentive stock options pursuant to the Stock Incentive Plan at
49
exercise prices which are less than the fair market value of the common stock on
the date of grant. The term of an incentive stock option granted under the Stock
Incentive Plan to a stockholder owning more than 10% of the issued and
outstanding common stock may not exceed five years and the exercise price of an
incentive stock option granted to such stockholder may not be less than 110% of
the fair market value of the common stock on the date of grant. The Stock
Incentive Plan contains certain limitations on the maximum number of shares of
the common stock that may be awarded in any calendar year to any one individual
for the purposes of Section 162(m) of the Code.
Generally, most of the options under the Stock Incentive Plan are granted
subject to periodic vesting over a period of between three and four years,
contingent upon continued employment with the Company. In addition to the stock
options covered by the Stock Incentive Plan, the Company has outstanding options
to purchase 615,200 shares of common stock. The following schedule identifies
the vesting schedule associated with all of the Company's outstanding options as
of February 28, 2005.
Plan Non-Plan Total
---------- ---------- ----------
Vested as of 12/31/04 7,402,194 615,200 8,017,394
To vest in 2005 1,736,692 1,736,692
To vest in 2006 1,053,843 1,053,843
To vest in 2007 380,837 380,837
To vest in 2008 150,229 150,229
To vest in 2009 33,656 33,656
---------- ---------- ----------
10,757,451 615,200 11,372,651
========== ========== ==========
At February 28, 2005, these options were outstanding at the following exercise
prices:
Number of Options
----------------------------------------
Plan Non-Plan Total Range of Exercise Prices
---------- ---------- ---------- ------------------------
3,473,334 422,000 3,895,334 $0.50 to $1.00
4,169,117 0 4,169,117 $1.01 to $2.00
3,115,000 120,000 3,235,000 $2.01 to $4.00
-- 73,200 73,200 $6.38 to $17.50
---------- ---------- ----------
10,757,451 615,200 11,372,651
========== ========== ==========
Outstanding Warrants
As of February 28, 2005, warrants to purchase 1,957,784 shares of common
stock were outstanding. Most of these warrants were granted in connection with
investment-related transactions. With the exception of warrants to purchase
50,000 shares at $1.23 per share, warrants to purchase 99,000 shares at $1.49
per share and warrants to purchase 600,000 shares at $5.00 per share, all of the
remaining warrants are subject to an exercise price of $1.00 per share and
expire in July 2005.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
OF THE BOARD OF DIRECTORS OF STONEPATH GROUP, INC.
The Compensation Committee of the Board of Directors (the "Compensation
Committee") consists of three (3) directors who are not employees of the Company
and who are considered "independent" under the rules of The American Stock
Exchange.
Role of the Committee
The Compensation Committee establishes, oversees and directs the Company's
executive compensation programs and policies and administers the Company's stock
option and other long-term incentive plans. The Compensation Committee seeks to
align executive compensation with Company objectives and strategies, business
financial performance and enhanced stockholder value.
50
The Compensation Committee regularly reviews and approves generally all
compensation and fringe benefit programs of the Company and also reviews and
determines the actual compensation of the Company's executive officers, as well
as all stock option grants and cash incentive awards to all key employees. The
Compensation Committee reviews and administers the Company's Stock Incentive
Plan and the Company's 2003 Employee Stock Purchase Plan.
The Compensation Committee's objectives include (i) attracting and
retaining exceptional individuals as executive officers and (ii) providing key
executives with motivation to perform to the full extent of their abilities, to
maximize Company performance and deliver enhanced value to the Company's
stockholders. The Compensation Committee believes it is important to place a
greater percentage of executive officers' total compensation, principally in the
form of equity, at risk through the grant of stock options whose value is
derived from the performance of the business and increase in the Company's
common stock price. Executive compensation consists primarily of an annual
salary, annual bonuses linked to the performance of the Company and long-term
equity-based compensation.
Compensation
Salary payments in 2004 were made to compensate the ongoing performance of
the Company's executive officers. Bonuses in 2004 were made to recognize
contributions to the Company's business strategy. The Compensation Committee's
specific decisions concerning 2004 compensation for each executive officer were
made in light of each officer's level of responsibility and the Compensation
Committee's judgment with respect to whether that executive officer's
compensation provides appropriate recognition for performance and an incentive
for future performance.
The Compensation Committee took a variety of actions during 2004 to
address the need to recruit and retain executives with relevant industry
experience.
The actions taken by the Compensation Committee during 2004 were designed
to reward the Company's senior management group for their efforts in
successfully implementing the Company's business plan and to provide additional
incentives to continue their efforts to achieve significant growth in the
Company's business and financial performance.
In determining the compensation to be provided to the Company's senior
management group during 2004, the Compensation Committee took into account the
following matters:
o The continued growth in the Company's revenues;
o Overall responsibilities and the importance of these
responsibilities to the Company's success;
o Experience and ability; and
o Past short-term and long-term job performance.
During 2004, the Compensation Committee and the Board of Directors changed
the basis for the compensation provided to Dennis L. Pelino, the Company's
Chairman and former Chief Executive Officer. The Compensation Committee
abandoned the objective of continuing to provide Mr. Pelino with the opportunity
to acquire up to ten percent (10%) of the amount of the Company's outstanding
common stock on a fully diluted basis. After reviewing the substantial
contributions made by Mr. Pelino to the Company's growth and the benefits the
Compensation Committee believed could result from his future contributions, the
Compensation Committee extended the term of his employment period through June
2009, the date the earnout period from the Company's most recent acquisition
expires, and increased his salary from its present level of $360,000 per year to
$500,000 per year. This increase was provided to Mr. Pelino in the form of an
award of options to purchase 359,000 shares of common stock that vest over the
term of his employment. The Compensation Committee separately determined that
Mr. Pelino was entitled to a bonus for 2003 based upon his performance, peer
group compensation levels, and the advice of an independent financial
consultant. This bonus was provided to Mr. Pelino by awarding him options to
purchase an additional 675,600 shares of common stock in lieu of a $1,080,000
cash bonus the Compensation Committee would have otherwise provided to him. The
decision to provide Mr. Pelino with options to purchase common stock instead of
the cash payment of his performance bonus for 2003 and the increase in his
annual salary was made after consultation with Mr. Pelino and in an effort to
accommodate his desire to conserve the cash resources of the Company to fund its
continued growth.
51
In October 2004, Mr. Pelino relinquished the role of Chief Executive
Officer and Jason F. Totah was appointed to that office. While Mr. Totah's
compensation did not change with his appointment to that office, he received an
award of options to purchase 400,000 shares of common stock in light of his
substantially increased responsibilities. Earlier in the year, Mr. Totah was
awarded options to purchase 93,100 shares of common stock in recognition of his
contributions as the Chief Executive Officer of Stonepath Logistics
International Services, Inc.
The Compensation Committee believes that the foregoing compensation
actions have helped develop a senior management group dedicated to achieving
significant improvement in both the short-term and long-term financial
performance of the Company.
COMPENSATION COMMITTEE OF THE BOARD
OF DIRECTORS
Aloysius T. Lawn, IV, Chairman
David R. Jones
John H. Springer
52
Performance Presentation
The following graph shows the total stockholder return of an investment of
$100 in cash on December 31, 1999 for the Company's common stock and an
investment of $100 in cash on that day for (i) the NASDAQ Market Index, (ii) the
AMEX Market Index and (iii) a peer group consisting of C.H. Robinson Worldwide,
Inc., EGL, Inc., Expeditors International of Washington, Inc., Forward Air
Corporation, and UTi Worldwide Inc. weighted by their market capitalization.
Historic stock performance is not necessarily indicative of future stock price
performance. All values assume reinvestment of the full amount of any dividends
and are calculated daily.
COMPARE CUMULATIVE TOTAL RETURN
AMONG STONEPATH GROUP INC.,
AMEX MARKET INDEX AND PEER GROUP INDEX
[LINE GRAPH OMITTED]
1999 2000 2001 2002 2003 2004
Stonepath Group 100.00 4.55 16.82 13.18 20.55 10.91
Peer Group Index 100.00 119.60 113.21 121.46 148.47 227.76
AMEX Market Index 100.00 98.77 94.22 90.46 123.12 140.99
NASDAQ Market Index 100.00 62.85 50.10 34.95 52.55 56.97
53
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following tables set forth information with respect to the beneficial
ownership of common stock owned, as of February 28, 2005, by:
o the holders of more than 5% of any class of the Company's voting
securities;
o each of the directors;
o each of the executive officers; and
o all directors and executives officers of the Company as a group.
As of February 28, 2005, an aggregate of 43,591,952 shares of common stock
were issued and outstanding. For purposes of computing the percentages under the
following tables, it is assumed that all options and warrants to acquire common
stock which have been issued to the directors, executive officers and the
holders of more than 5% of common stock and are fully vested or will become
fully vested within 60 days from February 28, 2005 have been exercised by these
individuals and the appropriate number of shares of common stock have been
issued to these individuals.
COMMON STOCK
- -------------------------------------------------------------------------------------------------
Shares Owned
Beneficially and Percentage
Name of Beneficial Owner Position of Record(1) of Class
Gruber and McBaine Capital Management, LLC.
50 Osgood Place, Penthouse,
San Francisco, CA 94133(2) Beneficial Owner 2,478,200 5.68
Dennis L. Pelino(3) Director 4,630,301 9.69
Jason F. Totah(3) Officer 415,353 *
Robert Arovas(3) Officer 66,000 *
Thomas L. Scully(3) Officer 68,775 *
Bohn H. Crain(3) Former Officer 1,195,797 2.66
David R. Jones(8) Director 167,500 *
Aloysius T. Lawn, IV(8) Director 77,500 *
Robert McCord(10) Director 100,000 *
J. Douglass Coates(11) Director 50,000 *
John H. Springer(12) Director 40,000 *
All directors and executive officers as a group
(10 people) 6,881,226 13.72
- ----------
(*) Less than one percent.
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in the
regulations of the SEC under the Exchange Act. They may include securities
owned by or for, among others, the spouse and/or minor children of an
individual and any other relative who has the same home as such
individual, as well as, other securities as to which the individual has or
shares voting or investment power. The number of shares beneficially owned
by the individual may include options to purchase shares of our common
stock exercisable as of, or within 60 days of February 28, 2005.
Beneficial ownership may be disclaimed as to certain of the securities.
(2) Based upon Schedule 13G filed on February 14, 2005 by a group consisting
of Gruber and McBaine Capital Management, LLC, Jon D. Gruber, J. Patterson
McBaine, Eric B. Swergold, and J. Lynne Rose. Gruber and McBaine Capital
Management, LLC, Eric B. Swergold, and J. Lynne Rose reported shared
voting and dispositive power of 2,007,750 shares. Jon D.Gruber reported
sole voting and dispositive power of 219,100 shares and shared voting and
dispositive power of 2,007,750 shares. J. Patterson McBaine reported sole
voting and dispositive power of 251,350 shares and shared voting and
dispositive power of 2,007,750 shares.
(3) Includes 431,222 shares of common stock held by Dennis Pelino and Meredith
L. Pelino Declaration of Trust, of which Dennis L. Pelino and his spouse
are trustees and beneficiaries, though beneficial ownership of which may
be disclaimed. Also includes 4,199,079 shares of common stock issuable
upon exercise of vested options presently exercisable and exercisable
within 60 days of February 28, 2005. Does not include 1,210,521 shares of
common stock issuable pursuant to options not presently exercisable and
not exercisable within 60 days of February 28, 2005.
54
(4) Includes 55,000 shares of common stock held by Mr. Totah. Also includes
360,353 shares of common stock issuable upon exercise of vested options
presently exercisable and exercisable within 60 days of February 28, 2005.
Does not include 369,667 shares of common stock issuable pursuant to
options not presently exercisable and not exercisable within 60 days of
February 28, 2005.
(5) Includes 66,000 shares of common stock issuable upon the exercise of
vested options presently exercisable. Does not include 134,000 shares of
common stock issuable pursuant to options not presently exercisable and
not exercisable within 60 days of February 28, 2005.
(6) Includes 7,779 shares of common stock held by Mr. Scully. Also includes
60,996 shares of common stock issuable upon exercise of vested options
presently exercisable and exercisable within 60 days of February 28, 2005.
Does not include 70,834 shares of common stock issuable pursuant to
options not presently exercisable and not exercisable within 60 days of
February 28, 2005.
(7) Includes 979,497 shares of common stock held by Mr. Crain. Also includes
1,098,300 shares of common stock issuable upon the exercise of vested
options presently exercisable.
(8) Includes 90,000 shares of common stock held by Mr. Jones. Also includes
77,500 shares of common stock issuable upon the exercise of vested options
presently exercisable and exercisable within 60 days of February 28, 2005.
Does not include 42,500 shares of common stock issuable pursuant to
options not presently exercisable and not exercisable within 60 days of
February 28, 2005.
(9) Includes 77,500 shares of common stock issuable upon the exercise of
vested options presently exercisable. Does not include 42,500 shares of
common stock issuable pursuant to options not presently exercisable and
not exercisable within 60 days of February 28, 2005.
(10) Includes 100,000 shares of common stock issuable upon exercise of vested
options presently exercisable. Does not include 25,000 shares of common
stock issuable pursuant to options not presently exercisable and not
exercisable within 60 days of February 28, 2005.
(11) Includes 50,000 shares of common stock issuable upon exercise of vested
options presently exercisable. Does not include 25,000 shares of common
stock issuable pursuant to options not presently exercisable and not
exercisable within 60 days of February 28, 2005.
(12) Includes 15,000 shares of common stock held by Mr. Springer. Also includes
25,000 shares of common stock issuable upon exercise of options presently
exercisable. Does not include 50,000 shares of common stock issuable
pursuant to options not presently exercisable and not exercisable within
60 days of February 28, 2005.
Securities Authorized For Issuance Under Equity Compensation Plans
For information on the securities authorized for issuance under our equity
compensation plans, see "Equity Compensation Plan Information" in Item 5 of this
Annual Report on Form 10-K.
Item 13. Certain Relationships and Related Transactions
Loans to Officers
In connection with our acquisition of SLIS on April 4, 2002, we advanced
the sum of $350,000 to Jason F. Totah. Mr. Totah was a former shareholder of
SLIS and is now the Chief Executive Officer of the Company. The advance to Mr.
Totah is to be repaid through 2006 by offset against the earn-out amounts that
are otherwise due to Mr. Totah under the Stock Purchase Agreement. The balance
of Mr. Totah's advance was $87,500 at December 31, 2004.
Amendment and Restatement of Employment Arrangements with Executive Officers
On March 11, 2004, we entered into an amended employment agreement with
our former Chief Executive Officer, Dennis L. Pelino. This agreement amended our
prior agreements with Mr. Pelino dated February 22, 2002 and June 21, 2001 to
extend the term of his employment through June 2009, and to award Mr. Pelino a
salary increase in the form of additional options that vest over the period of
the employment agreement. On October 18, 2001, we amended the terms of the
options granted to Mr. Pelino under his original employment agreement dated June
21, 2001. We further amended the terms of Mr. Pelino's options on July 3, 2002,
when we accelerated the vesting of his original options to purchase 1,800,000
shares of our common stock and granted him options to purchase an additional
1,900,000 shares of our common stock.
On April 1, 2004, we amended the employment agreement of Jason F. Totah,
our Chief Executive Officer, to extend the term of his employment until April 1,
2009.
On November 12, 2004, we entered into a letter agreement with our then
Chief Financial Officer, Bohn Crain (the "Agreement"). The Agreement provided
for the continuation of his role as Chief Financial Officer of the Company until
December 31, 2004 or such earlier date as the Company may request. It also
provided for his continuing service as a consultant to the Company during 2005.
Under the terms of the Agreement, Mr. Crain was entitled to receive his current
base salary through December 31, 2004. During 2005, Mr. Crain is entitled to
receive monthly payments in the amount of $75,250 for each of January and
February and then monthly payments of $30,100 for the remainder of the year.
55
Item 14. Principal Accountant Fees and Services
During the year ended December 31, 2003, professional services were
provided to the Company by KPMG LLP, our former independent auditors. The
following table presents fees for professional services rendered by KPMG LLP for
the audit of the Company's annual financial statements for the year ended
December 31, 2003, and fees billed for other services rendered by KPMG LLP
during 2003.
2003
---------
Audit fees(1) $ 656,883
Audit related fees(2) 125,000
Tax fees(3) 73,900
All other fees --
---------
Total $ 855,783
=========
(1) Represents the aggregate fees billed for the audit of the Company's annual
financial statements, the reviews of the financial statements included in
the Company's quarterly reports on Form 10-Q, and services rendered in
connection with SEC registration statements and filings, all in 2003.
(2) Represents fees billed for acquisition related services.
(3) Represents fees billed for tax consulting services, primarily related to
international acquisitions.
For the year ended December 31, 2004, professional services were provided
to the Company by Grant Thornton LLP, our current independent auditors. The
following table presents fees for professional services rendered by Grant
Thornton LLP for the audit of the Company's annual financial statements for the
year ended December 31, 2004.
2004
---------
Audit fees(1) $ 630,862
Audit related fees --
Tax fees --
All other fees --
---------
Total $ 630,862
=========
(1) Audit fees represent aggregate fees billed for the audit for the Company's
annual financial statements and quarterly reports on Form 10-Q and 10-Q/A
for the second and third quarters of 2004.
Our Audit Committee approves the engagement of our independent auditors to
render audit and non-audit services before they are engaged. All of the services
for which fees are listed above were pre-approved by our Audit Committee.
56
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Documents filed as part of this Report:
1. Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm 63
Report of Independent Registered Public Accounting Firm 66
Report of Independent Registered Public Accounting Firm 67
Consolidated Balance Sheets as of December 31, 2004 and 2003 68
Consolidated Statements of Operations for the Years Ended
December 31, 2004, 2003 and 2002 69
Consolidated Statements of Stockholders' Equity and Comprehensive
Income (Loss) for the Years Ended December 31, 2004, 2003 and 2002 70
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004, 2003 and 2002 72
Notes to Consolidated Financial Statements 73
2. Financial Statement Schedule:
Report of Independent Registered Public Accounting Firm 99
Schedule II - Valuation and Qualifying Accounts 100
57
(b) Exhibit Listing:
Exhibit Document
Number --------
- ------
2.1 Stock Purchase Agreement by and among Stonepath Logistics, Inc.,
Stonepath Group, Inc. and M.G.R., Inc, Distribution Services, Inc.,
Contract Air, Inc., the Shareholders of M.G.R., Inc., Distribution
Services, Inc., Contract Air, Inc. and Gary A. Koch (as
shareholders' agent) (incorporated by reference to Exhibit 2.5 to
the Current Report on Form 8-K filed on October 19, 2001)
2.2 First Amendment to Stock Purchase Agreement by and among Stonepath
Logistics, Inc., Stonepath Group, Inc. and M.G.R., Inc, Distribution
Services, Inc., Contract Air, Inc., the Shareholders of M.G.R.,
Inc., Distribution Services, Inc., Contract Air, Inc. and Gary A.
Koch (as shareholders' agent) (incorporated by reference to Exhibit
2.6 to the Current Report on Form 8-K filed on October 19, 2001)
2.3 Stock Purchase Agreement dated March 5, 2002 by and among Stonepath
Group, Inc., Stonepath Logistics International Services, Inc. and
Global Transportation Services, Inc. and the Shareholders of Global
Transportation Services, Inc. and Jason F. Totah (as shareholders'
agent) (incorporated by reference to Exhibit 2.4 to the Form 8-K
Current Report on Form 8-K filed on April 19, 2002)
2.4 Stock Purchase Agreement dated April 9, 2002 by and among Stonepath
Logistics Domestic Services, Inc. and United American Acquisitions
and Management, Inc., d/b/a United American Freight Services, Inc.
and Douglas Burke (incorporated by reference to Exhibit 2.5 to the
Form 8-K Current Report filed on June 12, 2002)
2.5 Amendment to Stock Purchase Agreement dated May 30, 2002 by an among
Stonepath Logistics Domestic Services, Inc., and United American
Acquisitions and Management, Inc., d/b/a United Freight Services,
Inc. and Douglas Burke (incorporated by reference to Exhibit 2.6 to
the Form 8-K Current Report filed on June 12, 2002)
2.6 Asset Purchase Agreement by and among Stonepath Logistics Government
Services, Inc. (f/k/a "Transport Specialists, Inc."), Regroup
Express L.L.C. and Jed J. Shapiro and Charles R. Cain, the sole
members of Regroup Express LLC, dated June 4, 2003 (incorporated by
reference to Exhibit 2.6 to the Form 8-K Current Report filed on
July 7, 2003)
2.7 Asset Purchase Agreement by and among Stonepath Holdings (Hong Kong)
Limited, G Link Express Logistics (Singapore) Pte. Ltd, G Link
Express Pte. Ltd and the shareholders of G Link Express Pte. Ltd,
dated August 8, 2003 (incorporated by reference to Exhibit 2.7 to
the Form 8-K Current Report filed on August 13, 2003)
2.8 Asset Purchase Agreement by and among Stonepath Holdings (Hong Kong)
Limited, G Link Express (Cambodia) Pte. Ltd and the shareholders of
G Link Express (Cambodia) Pte. Ltd. dated August 8, 2003
(incorporated by reference to Exhibit 2.8 to the Form 8-K Current
Report filed on August 13, 2003)
2.9 Amended and Restated Contract for the Sale of Assets by and between
Stonepath Holdings (Hong Kong) Limited and Andy Tsai dated November
10, 2003 (incorporated by reference to Exhibit 2.9 to Form 8-K
Current Report filed on February 24, 2004)
2.10 Letter Agreement dated February 9, 2004 amending the Amended and
Restated Contract for the Sale of Assets by and between Stonepath
Holdings (Hong Kong) Limited and Andy Tsai dated November 10, 2003
(incorporated by reference to Exhibit 2.10 to Form 8-K Current
Report filed on February 24, 2004)
58
3.1 Amended and Restated Certificate of Incorporation of Stonepath
Group, Inc. (incorporated by reference to Exhibit 3.1 to the
Registration Statement on Form S-1 (Registration No. 333-88629)
3.2 Certificate of Amendment to the Certificate of Incorporation of
Stonepath Group, Inc. (incorporated by reference to Exhibit 3.2 to
the Form 10-K Annual Report filed on April 2, 2001)
3.3 Amended and Restated Bylaws of Stonepath Group, Inc. (incorporated
by reference to Exhibit 3.3 to the Form 10-K Annual Report filed on
April 2, 2001)
4.1 Specimen Common Stock Certificate for Stonepath Group, Inc.
(incorporated by reference to Exhibit 4.25 to Amendment No. 1 to the
Registration Statement on Form S-3 (Registration No. 333-91240)
filed on July 31, 2002)
4.2 Form of Common Stock Purchase Warrant issued in connection with the
Series C Convertible Preferred Stock (incorporated by reference to
Exhibit 4.2 to Form 8-K Current Report filed on March 17, 2000)
4.3 Form of Amendment to Common Stock Purchase Warrant issued upon
conversion of the Series C Convertible Preferred Stock effective as
of July 19, 2002 (incorporated by reference to Exhibit 4.30 to the
Form 10-Q Quarterly Report filed on November 14, 2002)
4.4 Form of Contingent Warrant issued upon conversion of the Series C
Convertible Preferred Stock effective as of July 19, 2002
(incorporated by reference to Exhibit 4.29 to the Form 10-Q
Quarterly Report filed on November 14, 2002)
4.5 Form of Exchange Agreement by and between the Company and certain
holders of the Company's Series C Convertible Preferred Stock
(incorporated by reference to Exhibit 4.26 to Amendment No. 1 to the
Registration Statement on Form S-3 (Registration No. 333-91240)
filed on July 31, 2002)
4.6* Stonepath Group, Inc. Amended and Restated 2000 Stock Incentive Plan
(incorporated by reference to Exhibit A to the Schedule 14A Proxy
Statement filed on April 8, 2004)
4.7* Form of Stock Option Agreement under the Plan (incorporated by
reference to Exhibit 4.2 to the Registration Statement on Form S-8
(Registration No. 333-74918) filed on December 11, 2001)
4.8* Form of Non-Plan Option to Purchase Common Stock of the Company
(incorporated by reference to Exhibit 4.3 to the Registration
Statement on Form S-8 (Registration No. 333-74918) filed on December
11, 2001)
4.9 Form of Subscription Agreement by and between the Company and
certain purchasers of common shares (including exhibit providing for
registration rights) (incorporated by reference to Exhibit 4.19 to
the Form 10-K Annual Report filed on March 31, 2003)
4.10 Placement Agency Agreement between the Company and Stonegate
Securities, Inc. dated October 16, 2002 (incorporated by reference
to Exhibit 4.20 to the Form 10-K Annual Report filed on March 31,
2003)
4.11* 2003 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 99.1 to the Registration Statement on Form S-8 (Registration
No. 333-109249) filed on September 29, 2003)
4.12 Form of Initial Warrants issued to Stonegate Securities, Inc. as of
October 16, 2002 (incorporated by reference to Exhibit 4.24 to the
Registration Statement on Form S-3 (Registration No. 333- 104228)
filed on April 1, 2003)
59
4.13 Form of Representative's Warrants issued to Stonegate Securities,
Inc. as of March 6, 2003 (incorporated by reference to Exhibit 4.25
to the Registration Statement on Form S-3 (Registration No. 333-
104228) filed on April 1, 2003)
4.14 Form of subscription agreement by and between the Company and
certain holders of common stock (including the exhibit providing for
registration rights) (incorporated by reference to Exhibit 4.27 to
the Registration Statement on Form S-3 (Registration No. 110231)
filed on November 4, 2003)
4.15 Amendment to Placement Agency Agreement between the Company and
Stonegate Securities, Inc. dated as of July 29, 2003 (including the
exhibit providing for registration rights) (incorporated by
reference to Exhibit 4.28 to the Registration Statement on Form S-3
(Registration No. 110231) filed on November 4, 2003)
10.1* Amended and Restated Employment Agreement between the Company and
Dennis L. Pelino dated February 22, 2002 (incorporated by reference
to Exhibit 10.2 to the Form 10-K Annual Report filed on March 29,
2002)
10.2* Modification to Employment Agreement of Dennis L. Pelino dated March
11, 2004 (incorporated by reference to Exhibit 10.14 of the Form
10-K Annual Report filed on March 15, 2004)
10.3* Executive Employment Agreement between Global Transportation
Services, Inc. and Jason F. Totah dated April 4, 2002 (incorporated
by reference to Exhibit 10.7 to the Form 10-K Annual Report filed on
March 31, 2003)
10.4* Amendment to Executive Employment Agreement of Jason F. Totah dated
April 1, 2004 (incorporated by reference to Exhibit 10.14 to Form
10-Q Quarterly Report filed on May 10, 2004)
10.5* Employment Agreement dated February 2, 2005 by and between Stonepath
Group, Inc. and Robert Arovas (incorporated by reference to Exhibit
10.22 to Form 8-K/A Current Report filed on February 7, 2005)
10.6* Amended and Restated Employment Agreement between the Company and
Bohn H. Crain dated February 24, 2003 (incorporated by reference to
Exhibit 10.4 to the Form 10-K Annual Report filed on March 31, 2003)
10.7* Letter Agreement dated November 12, 2004 between the Company and
Bohn H. Crain (incorporated by reference to Exhibit 10.18 to the
Form 8-K Current Report filed on November 18, 2004)
10.8* Stonepath Group, Inc. 401(k) Profit Sharing Plan (incorporated by
reference to Exhibit 10.12 to the Registration Statement on Form S-8
(Registration No. 333- 103439) filed on February 25, 2003
10.9 Loan and Security Agreement dated as of May 15, 2002 between LaSalle
Business Credit, Inc. and Stonepath Group, Inc., Contract Air, Inc.,
Distribution Services, Inc., Global Transportation Services, Inc.,
Global Container Line, Inc., M.G.R., Inc., d/b/a Air Plus Limited,
Net Value, Inc., Stonepath Logistics Domestic Services, Inc.,
Stonepath Logistics International Services, Inc. and Stonepath
Operations, Inc. (incorporated by reference to Exhibit 10.2 to the
Form 8-K Current Report filed on May 20, 2002)
60
10.10 Amendment to Loan and Security Agreement dated May 15, 2003 by and
among LaSalle Business Credit, LLC, Stonepath Group, Inc., Contract
Air, Inc., Distribution Services, Inc., Global Container Line, Inc.,
M.G.R., Inc., Net Value, Inc., Stonepath Logistics Domestic
Services, Inc., Stonepath Logistics International Services, Inc.,
Stonepath Operations Inc., and United American Acquisitions and
Management, Inc., and Transport Specialists, Inc. (incorporated by
reference to Exhibit 10.10 to the Form 10-K Annual Report filed on
March 15, 2004)
10.11 Second Amendment to Loan and Security Agreement dated September 5,
2003 by and among LaSalle Business Credit, LLC, Stonepath Group,
Inc., Contract Air, Inc., Distribution Services, Inc., Global
Container Line, Inc., M.G.R., Inc., Net Value, Inc., Stonepath
Logistics Domestic Services, Inc., Stonepath Logistics Government
Services, Inc., Stonepath Logistics International Services, Inc.,
Stonepath Logistics International Services, Inc., Stonepath
Operations Inc., and United American Acquisitions and Management,
Inc. (incorporated by reference to Exhibit 10.10 to the Form 8-K
Current Report filed on September 9, 2003)
10.12 Third Amendment to Loan and Security Agreement dated December 23,
2003 by and among LaSalle Business Credit, LLC, Stonepath Group,
Inc., Contract Air, Inc., Distribution Services, Inc., Global
Container Line, Inc., M.G.R., Inc., Net Value, Inc., Stonepath
Logistics Domestic Services, Inc., Stonepath Logistics Government
Services, Inc., Stonepath Logistics International Services, Inc.,
Stonepath Logistics International Services, Inc., Stonepath
Operations Inc., and United American Acquisitions and Management,
Inc. (incorporated by reference to Exhibit 10.12 to the Form 10-K
Annual Report filed on March 15, 2004)
10.13 Fourth Amendment and Consent Agreement to Loan and Security
Agreement dated January 30, 2004 by and among LaSalle Business
Credit, LLC, Stonepath Group, Inc., Contract Air, Inc., Distribution
Services, Inc., Global Container Line, Inc., M.G.R., Inc., Net
Value, Inc., Stonepath Logistics Domestic Services, Inc., Stonepath
Logistics Government Services, Inc., Stonepath Logistics
International Services, Inc., Stonepath Logistics International
Services, Inc., Stonepath Operations Inc., and United American
Acquisitions and Management, Inc. (incorporated by reference to
Exhibit 10.13 to the Form 10-K Annual Report filed on March 15,
2004)
10.14 Fifth Amendment and Joinder to Loan and Security Agreement dated
April 6, 2004 by and among LaSalle Business Credit, LLC, Stonepath
Group, Inc., Contract Air, Inc., Distribution Services, Inc., Global
Container Line, Inc., M.G.R., Inc., Net Value, Inc., Stonepath
Logistics Domestic Services, Inc., Stonepath Logistics Government
Services, Inc., Stonepath Logistics International Services, Inc.,
Stonepath Logistics International Services, Inc., Stonepath
Operations Inc., and United American Acquisitions and Management,
Inc. D/B/A United American Freight Services, Inc., and Stonepath
Offshore Holdings, Inc. (incorporated by reference to Exhibit 10.16
to Form 10-Q Quarterly Report filed on August 9, 2004)
10.15 Sixth Amendment to Loan and Security Agreement dated July 28, 2004
by and among LaSalle Business Credit, LLC, Stonepath Group, Inc.,
Contract Air, Inc., Distribution Services, Inc., Global Container
Line, Inc., M.G.R., Inc., Net Value, Inc., Stonepath Logistics
Domestic Services, Inc., Stonepath Logistics Government Services,
Inc., Stonepath Logistics International Services, Inc., Stonepath
Logistics International Services, Inc., Stonepath Operations Inc.,
and United American Acquisitions and Management, Inc. D/B/A United
American Freight Services, Inc., and Stonepath Offshore Holdings,
Inc. (incorporated by reference to Exhibit 10.17 to Form 10-Q
Quarterly Report filed on August 9, 2004)
61
10.16 Seventh Amendment to Loan and Security Agreement dated November 17,
2004 by and among LaSalle Business Credit, LLC, Stonepath Group,
Inc., Contract Air, Inc., Distribution Services, Inc., Global
Container Line, Inc., M.G.R., Inc., Net Value, Inc., Stonepath
Logistics Domestic Services, Inc., Stonepath Logistics Government
Services, Inc., Stonepath Logistics International Services, Inc.,
Stonepath Logistics International Services, Inc., Stonepath
Operations Inc., and United American Acquisitions and Management,
Inc. D/B/A United American Freight Services, Inc., and Stonepath
Offshore Holdings, Inc. (incorporated by reference to Exhibit 10.19
to Form 8-K Current Report filed on November 18, 2004).
10.17 Term Credit Agreement Dated October 27, 2004 By And Between
Stonepath Holdings, (Hong Kong) Limited, Hong Kong League Central
Credit Union, and SBI Advisors, LLC (incorporated by reference to
Exhibit 10.20 to Form 10-Q Quarterly Report filed on January 6,
2005)
10.18 Guaranty of Stonepath Group, Inc., in favor of Hong Kong League
Central Credit Union (incorporated by reference to Exhibit 10.21 to
Form 10-Q Quarterly Report filed on January 6, 2005)
10.19 Waiver and Rider No. 7 to Equipment Lease Agreement dated as of
March 30, 2005 between Stonepath Group, Inc., MGR, Inc. d/b/a Air
Plus Limited, Stonepath Logistics Domestic Services, Inc. and
LaSalle National Leasing Corporation
10.20 Eighth Amendment to Loan and Security Agreement dated March 30, 2005
by and among LaSalle Business Credit, LLC, Stonepath Group, Inc.,
Contract Air, Inc., Distribution Services, Inc., Global Container
Line, Inc., M.G.R., Inc. d/b/a Air Plus Limited, Net Value, Inc.,
Stonepath Logistics Domestic Services, Inc., Stonepath Logistics
Government Services, Inc., Stonepath Logistics International
Services, Inc., Stonepath Logistics International Services, Inc.
f/k/a Global Transportation Services, Inc., Stonepath Offshore
Holding, Inc., Stonepath Operations Inc., and United American
Acquisitions and Management, Inc. d/b/a United American Freight
Services, Inc.
11 Code of Ethics
12 Calculation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends
21.1 Subsidiaries of Stonepath Group, Inc.
23.1 Consent of Independent Registered Public Accounting Firm
23.2 Consent of Independent Registered Public Accounting Firm
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. (This exhibit shall not be deemed
"filed" for purposes of Section 18 of the Securities Exchange Act of
1934, as amended, or otherwise subject to the liability of that
section. Further, this exhibit shall not be deemed to be
incorporated by reference into any filing under the Securities Act
of 1933, as amended, or the Securities Exchange Act of 1934, as
amended.)
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. (This exhibit shall not be deemed
"filed" for purposes of Section 18 of the Securities Exchange Act of
1934, as amended, or otherwise subject to the liability of that
section. Further, this exhibit shall not be deemed to be
incorporated by reference into any filing under the Securities Act
of 1933, as amended, or the Securities Exchange Act of 1934, as
amended.)
* Constitutes a management contract or compensatory plan or arrangement
62
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
Stonepath Group, Inc. and Subsidiaries
Philadelphia, Pennsylvania
We were engaged to audit management's assessment included in the accompanying
Management's Report on Internal Control over Financial Reporting that Stonepath
Group, Inc. and subsidiaries (the Company) maintained effective internal control
over financial reporting as of December 31, 2004, based on the criteria
established in the Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weaknesses have been identified and included
in management's assessment:
The Company had inadequate controls related to its assessment of the
effectiveness of the Company's internal control over financial reporting.
Management was not able to complete their assessment in a timely manner
and completed their assessment on February 11, 2005, which did not allow
adequate time for the external auditors to complete their audit of
management's report on the effectiveness of the Company's internal control
over financial reporting.
The Company has inadequate controls related to its consolidation process.
The Company's consolidation process is a manual process performed by
individuals with the ability to initiate and record adjustments within the
consolidation. Certain reporting subsidiaries maintain two general ledger
applications which creates the potential for errors as a result of
entering information twice. The Company has a large number of entities and
a large number of different applications. The Company's process for the
consolidation of accounting information from this number of entities and
applications is error prone. In addition, the corporate office has the
ability to make adjustments to the consolidation without any documented
level of approval.
63
The Company had inadequate controls related to the accounting for
purchased transportation. The Company's public filings for fiscal years
2003 and 2002, and for the first and second quarters of fiscal year 2004
have been restated due to control deficiencies related to the accrued
purchased transportation. The process for accounting for accrued purchased
transportation did not accurately account for the differences between the
estimates and the actual freight costs incurred. This allowed for an
accumulation of previously unrecorded purchased transportation costs to
accumulate (such amounts should have been reflected as purchased
transportation costs). In addition, the error resulted in the Company
making earn-out payments to selling shareholders in amounts greater than
what otherwise would have been owed.
The Company had inadequate controls related to the approval of contracts,
and initiating and approving adjustments related to claims. A key member
of management of a Company subsidiary was responsible for initiating and
approving contracts. This individual also had the ability to initiate and
approve the recording of related transactions to contracts. We noted that
this individual was responsible for establishing policies and procedures,
establishing limits of authority, and approving customers.
The Company had inadequate controls related to application access rights
at its International Services subsidiary. Various employees have access to
numerous application programs that are outside of the employees' job
requirements. For example, of the 82 employees of the subsidiary, 34 have
the ability to add, delete, or modify vendors and 27 employees have the
ability to issue checks. Of the 60 users who have the ability to initiate
a payment, 28 are authorized signatories with the bank. In addition, all
users have access to enter payment information into the accounts payable
subsystem regardless of job responsibility.
We believe these conditions are material weaknesses in the design or operation
of the internal control of the Company in effect at December 31, 2004. Although
the Company has implemented new controls before and after December 31, 2004, the
new controls were either not in operation for a sufficient period of time to
enable us to obtain sufficient evidence about their operating effectiveness or
the new controls were not in operation during the period under audit.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
64
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Because management was not able to complete their assessment of the
effectiveness of the Company's internal control over financial reporting in a
timely manner and we were unable to apply other procedures to satisfy ourselves
as to the effectiveness of the Company's internal control over financial
reporting, the scope of our work was not sufficient to enable us to express, and
we do not express, an opinion either on management's assessment or on the
effectiveness of the Company's internal control over financial reporting.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board, (United States), the consolidated balance sheet as
of December 31, 2004 and related consolidated statements of operations,
shareholders' equity and comprehensive income (loss), and cash flows for the
year then ended of Stonepath Group, Inc. and subsidiaries and our report dated
March 30, 2005 expressed an unqualified opinion on those financial statements.
GRANT THORNTON LLP
Minneapolis, Minnesota
March 30, 2005
65
Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors
Stonepath Group, Inc. and Subsidiaries
Philadelphia, Pennsylvania
We have audited the accompanying consolidated balance sheet of Stonepath
Group, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2004,
and the related consolidated statements of operations, stockholders' equity and
comprehensive income (loss), and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Stonepath
Group, Inc. and subsidiaries as of December 31, 2004, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
Our audits were conducted for the purpose of forming an opinion on the
basic consolidated financial statements taken as a whole. The accompanying
Schedule II of Stonepath Group, Inc. and subsidiaries for the year ended
December 31, 2004 is presented for purposes of additional analysis and is not a
required part of the basic consolidated financial statements. This schedule has
been subjected to the auditing procedures applied in the audits of the basic
consolidated financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic consolidated 2004 financial
statements taken as a whole.
Additionally, we were engaged to audit, in accordance with the standards
of the Public Company Accounting Oversight Board (United States), the
effectiveness of the Company's internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and our report dated March 30, 2005, disclaimed an opinion on
management's assessment of the effectiveness of the Company's internal control
over financial reporting and disclaimed an opinion on the effectiveness of the
Company's internal control over financial reporting.
/s/GRANT THORNTON LLP
Minneapolis, Minnesota
March 30, 2005
66
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders of
Stonepath Group, Inc.:
We have audited the accompanying consolidated balance sheet of Stonepath Group,
Inc. (a Delaware corporation) and subsidiaries (the Company) as of December 31,
2003 and the related consolidated statements of operations, stockholders' equity
and comprehensive income (loss) and cash flows for each of the years in the
two-year period ended December 31, 2003. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Stonepath Group,
Inc. and subsidiaries as of December 31, 2003 and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 2003, in conformity with U.S. generally accepted accounting
principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
February 24, 2004
67
STONEPATH GROUP, INC.
Consolidated Balance Sheets
December 31, 2004 and 2003
2004 2003
------------- -------------
Assets
Current assets:
Cash and cash equivalents $ 2,800,645 $ 3,074,151
Accounts receivable, less allowances for doubtful accounts of
$1,872,000 and $1,055,000 at 2004 and 2003, respectively 64,064,382 38,250,610
Loans receivable from related parties -- 14,597
Prepaid expenses and other current assets 2,559,858 2,216,700
------------- -------------
Total current assets 69,424,885 43,556,058
Goodwill 37,278,661 31,508,931
Technology, furniture and equipment, net 7,595,859 7,062,956
Acquired intangibles, net 7,079,986 6,775,893
Note receivable, related party 87,500 175,000
Other assets 1,479,181 1,189,917
------------- -------------
Total assets $ 122,946,072 $ 90,268,755
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Lines of credit $ 16,911,700 $ --
Accounts payable 38,537,750 22,412,287
Earn-outs payable 2,645,695 3,548,534
Accrued payroll and related expenses 3,192,889 1,975,859
Accrued restructuring costs 741,637 --
Capital lease obligation - current portion 1,510,461 671,197
Accrued expenses 5,627,276 1,821,671
------------- -------------
Total current liabilities 69,167,408 30,429,548
Capital lease obligation - net of current portion -- 1,134,815
Other long-term liabilities 2,064,128 --
Deferred tax liability 1,650,900 1,035,600
------------- -------------
Total liabilities 72,882,436 32,599,963
------------- -------------
Minority interest 5,094,336 1,345,790
------------- -------------
Commitments and contingencies (Notes 10 and 11)
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares authorized;
Series D, convertible, issued and outstanding: 310,477 shares
at 2003 -- 310
Common stock, $.001 par value, 100,000,000 shares authorized;
issued and outstanding: 42,839,795 and 37,449,944 shares at
2004 and 2003, respectively 42,840 37,450
Additional paid-in capital 221,728,796 220,067,956
Accumulated deficit (176,806,892) (163,763,537)
Accumulated other comprehensive income 35,856 1,997
Deferred compensation (31,300) (21,174)
------------- -------------
Total stockholders' equity 44,969,300 56,323,002
------------- -------------
Total liabilities and stockholders' equity $ 122,946,072 $ 90,268,755
============= =============
See accompanying notes to consolidated financial statements.
68
STONEPATH GROUP, INC.
Consolidated Statements of Operations
Years ended December 31, 2004, 2003 and 2002
2004 2003 2002
------------- ------------- -------------
Total revenue $ 367,080,665 $ 220,084,190 $ 122,787,625
Cost of transportation 282,358,647 158,105,595 86,084,863
------------- ------------- -------------
Net revenue 84,722,018 61,978,595 36,702,762
Personnel costs 44,987,407 31,887,773 19,089,069
Other selling, general and administrative costs 36,753,275 24,583,040 14,679,960
Depreciation and amortization 4,189,040 2,659,882 2,186,951
Restructuring charges 4,368,250 -- --
Litigation settlement and nonrecurring costs -- 1,169,035 --
------------- ------------- -------------
Income (loss) from operations (5,575,954) 1,678,865 746,782
Other income (expense):
Provisions for excess earn-out payments (3,075,190) (1,270,141) --
Interest income 61,964 48,909 90,680
Interest expense (639,491) (141,859) --
Other income 1,024 84,850 37,311
------------- ------------- -------------
Income (loss) from continuing operations before
income taxes and minority interest (9,227,647) 400,624 874,773
Income tax expense 2,395,812 735,886 421,177
------------- ------------- -------------
Income (loss) from continuing operations before
minority interest (11,623,459) (335,262) 453,596
Minority interest 1,394,896 187,310 --
------------- ------------- -------------
Income (loss) from continuing operations (13,018,355) (522,572) 453,596
Loss from discontinued operations, net of tax (25,000) (263,031) --
------------- ------------- -------------
Net income (loss) (13,043,355) (785,603) 453,596
Preferred stock dividends and effect of redemption -- -- 15,020,148
------------- ------------- -------------
Net income (loss) attributable to common stockholders $ (13,043,355) $ (785,603) $ 15,473,744
============= ============= =============
Basic earnings (loss) per common share -
Continuing operations $ (0.33) $ (0.02) $ 0.70
Discontinued operations -- (0.01) --
------------- ------------- -------------
Earnings (loss) per common share $ (0.33) $ (0.03) $ 0.70
============= ============= =============
Diluted earnings (loss) per common share -
Continuing operations (0.33) $ (0.02) $ 0.02
Discontinued operations -- (0.01) --
------------- ------------- -------------
Earnings (loss) per common share $ (0.33) (0.03) $ 0.02
============= ============= =============
Basic weighted average common shares outstanding 38,971,526 29,625,585 22,154,861
============= ============= =============
Diluted weighted average common shares outstanding 38,971,526 29,625,585 29,232,568
============= ============= =============
See accompanying notes to consolidated financial statements.
69
STONEPATH GROUP, INC.
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
Years ended December 31, 2004, 2003 and 2002
Preferred Stock
-----------------------------------------------------
Series C Series D Common Stock Additional
------------------------- ------------------------ -------------------------- paid-in
Shares Amount Shares Amount Shares Amount capital
----------- ---------- ---------- ---------- ------------ ----------- ------------
Balances at January 1, 2002 3,750,479 $ 3,750 -- $ -- 20,903,110 $ 20,903 $210,730,999
Net income -- -- -- -- -- -- --
Exercise of options and
warrants -- -- -- -- 440,808 441 424,740
Series C Preferred Stock
conversion (3,913,220) (3,913) 360,742 361 2,109,496 2,109 (16,971,597)
Preferred stock dividends 162,741 163 -- -- -- -- 1,952,729
Compensatory common stock,
options and warrants
issued, net of
cancellations -- -- -- -- -- -- 95,000
Amortization of deferred
stock-based compensation -- -- -- -- -- -- 3,193
----------- ---------- ---------- ---------- ------------ ----------- ------------
Balances at December 31, 2002 -- -- 360,742 361 23,453,414 23,453 196,235,064
Net loss -- -- -- -- -- -- --
Other comprehensive income:
Foreign currency
translation adjustment -- -- -- -- -- -- --
Comprehensive loss
Issuance of common stock, net
of issuance costs -- -- -- -- 10,453,500 10,454 18,054,961
Exercise of options and
warrants -- -- -- -- 920,739 921 649,858
Series D Convertible
Preferred Stock conversion -- -- (50,265) (51) 502,650 503 (452)
Issuance of common stock in
lieu of cash for earn-out -- -- -- -- 254,825 255 402,745
Issuance of common stock in
lieu of cash for legal
settlement -- -- -- -- 271,339 271 583,279
Issuance of common stock for
acquisitions -- -- -- -- 1,593,477 1,593 4,142,501
Amortization of deferred
stock-based compensation -- -- -- -- -- -- --
----------- ---------- ---------- ---------- ------------ ----------- ------------
Balances at December 31, 2003 -- -- 310,477 310 37,449,944 37,450 220,067,956
Net loss -- -- -- -- -- -- --
Other comprehensive income:
Foreign currency
translation adjustment -- -- -- -- -- -- --
Comprehensive loss
Exercise of options and
warrants -- -- -- 2,119,108 2,119 1,269,631
Series D Convertible
Preferred Stock conversion -- -- (310,477) (310) 3,104,770 3,105 (2,795)
Issuance of common stock to
Employee Stock Purchase
Plan -- -- -- -- 123,238 123 224,047
Issuance of common stock for
acquisitions -- -- -- -- 42,735 43 99,957
Options issued to consultant -- -- -- -- -- -- 70,000
Amortization of deferred
stock-based compensation -- -- -- -- -- -- --
----------- ---------- ---------- ---------- ------------ ----------- ------------
Balances at December 31, 2004 -- $ -- -- $ -- 42,839,795 $ 42,840 $221,728,796
=========== ========== ========== ========== ============ =========== ============
See accompanying notes to consolidated financial statements.
70
STONEPATH GROUP, INC.
Consolidated Statements of Stockholders' Equity
and Comprehensive Income (Loss) (continued)
Years ended December 31, 2004, 2003 and 2002
Accumulated
other Deferred Total
Accumulated comprehensive stock-based comprehensive
deficit income compensation Total income (loss)
------------- ------------- ------------- ------------- -------------
Balances at January 1, 2002 $(178,451,678) $ -- $ (211,638) $ 32,092,336
Net income 453,596 -- -- 453,596 $ 453,596
=============
Exercise of options and warrants -- -- -- 425,181
Series C Preferred Stock
conversion 16,973,040 -- -- --
Preferred stock dividends (1,952,892) -- -- --
Compensatory common stock,
options and warrants issued,
net of cancellations -- -- -- 95,000
Amortization of deferred
stock-based compensation -- -- 95,232 98,425
------------- ------------- ------------- -------------
Balances at December 31, 2002 (162,977,934) -- (116,406) 33,164,538
Net loss (785,603) -- -- (785,603) $ (785,603)
Other comprehensive income:
Foreign currency translation
adjustment -- 1,997 -- 1,997 1,997
-------------
Comprehensive loss $ (783,606)
=============
Issuance of common stock, net of
issuance costs -- -- -- 18,065,415
Exercise of options and warrants -- -- -- 650,779
Series D Convertible Preferred
Stock conversion -- -- -- --
Issuance of common stock in lieu
of cash for earn-out -- -- -- 403,000
Issuance of common stock in lieu
of cash for legal settlement -- -- -- 583,550
Issuance of common stock for
acquisitions -- -- -- 4,144,094
Amortization of deferred
stock-based compensation -- -- 95,232 95,232
------------- ------------- ------------- -------------
Balances at December 31, 2003 (163,763,537) 1,997 (21,174) 56,323,002
Net loss (13,043,355) -- -- (13,043,355) $ (13,043,355)
Other comprehensive income:
Foreign currency translation
adjustment -- 33,859 -- 33,859 33,859
-------------
Comprehensive loss $ (13,009,496)
=============
Exercise of options and warrants -- -- -- 1,271,750
Series D Convertible Preferred
Stock conversion -- -- -- --
Issuance of common stock to
Employee Stock Purchase Plan -- -- -- 224,170
Issuance of common stock for
Acquisitions -- -- -- 100,000
Options issued to consultant -- -- (70,000) --
Amortization of deferred
stock-based compensation -- -- 59,874 59,874
------------- ------------- ------------- -------------
Balances at December 31, 2004 $(176,806,892) $ 35,856 $ (31,300) $ 44,969,300
============= ============= ============= =============
See accompanying notes to consolidated financial statements.
71
STONEPATH GROUP, INC.
Consolidated Statements of Cash Flows
Years ended December 31, 2004, 2003 and 2002
2004 2003 2002
------------- ------------- -------------
Cash flows from operating activities:
Net income (loss) $ (13,043,355) $ (785,603) $ 453,596
Adjustments to reconcile net income (loss) to net cash
used in operating activities, net of acquisitions:
Deferred income taxes 615,300 574,800 389,300
Depreciation and amortization 4,189,040 2,659,882 2,186,951
Stock-based compensation 59,874 95,232 98,425
Minority interest in income of subsidiaries 1,394,896 187,310 --
Loss from disposal of furniture and equipment 8,350 -- 4,560
Non-cash restructuring charges 3,556,133 -- --
Issuance of common stock in litigation settlement -- 350,000 --
Issuance of common stock to vendor of former business -- 135,000 --
Issuance of common stock in offering penalty -- 98,550 --
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable (11,957,872) (11,187,538) (5,731,830)
Other assets 11,973 (887,891) (160,903)
Accounts payable and accrued expenses 13,587,422 4,771,653 2,176,634
------------- ------------- -------------
Net cash used in operating activities (1,578,239) (3,988,605) (583,267)
------------- ------------- -------------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (8,004,253) (9,385,908) (10,497,306)
Purchases of technology, furniture and equipment (4,909,148) (4,183,201) (1,812,750)
Loans made (75,000) (130,000) (350,000)
Payment of earn-out (3,431,285) (2,206,715) --
Discontinued operations:
Proceeds from sale of ownership interests in affiliate
companies -- -- 115,000
------------- ------------- -------------
Net cash used in investing activities (16,419,686) (15,905,824) (12,545,056)
------------- ------------- -------------
Cash flows from financing activities:
Issuance of common stock -- 18,185,415 --
Payment of equity financing fees -- -- (25,000)
Payment of debt financing fees (250,000) -- (233,580)
Proceeds from line of credit, net 16,911,700 -- --
Proceeds from financing of equipment -- 2,049,638 --
Principal payments on capital lease (753,959) (265,178) --
Proceeds related to minority interest in subsidiary -- 81,818 --
Proceeds from issuance of common stock upon exercise of
options and warrants 1,782,819 650,779 425,181
------------- ------------- -------------
Net cash provided by financing activities 17,690,560 20,702,472 166,601
------------- ------------- -------------
Effect of foreign currency translation 33,859 -- --
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents (273,506) 808,043 (12,961,722)
Cash and cash equivalents, beginning of year 3,074,151 2,266,108 15,227,830
------------- ------------- -------------
Cash and cash equivalents, end of year $ 2,800,645 $ 3,074,151 $ 2,266,108
============= ============= =============
Cash paid for interest $ 617,007 $ 189,359 $ --
============= ============= =============
Cash paid for income taxes $ 157,145 $ 373,832 $ 84,959
============= ============= =============
Supplemental disclosure of non-cash investing and financing
activities:
Issuance of common stock in satisfaction of earn-out $ -- $ 403,000 $ --
Increase in goodwill related to accrued earn-out payments 2,615,946 3,636,034 2,697,215
Issuance of warrants in connection with consulting services 70,000 -- 95,000
Offset of related party loan against earn-out 87,500 87,500 87,500
Issuance of common stock in connection with acquisitions 100,000 4,144,094 --
Issuance of common stock from conversion of Series D
Convertible Preferred Stock 310 51 --
Issuance of common stock in connection with cashless
exercise of options 511,068 -- --
Issuance of common stock in connection with Employee Stock
Purchase Plan 224,170 -- --
Increase in technology, furniture and equipment from
capital lease obligations 458,408 -- --
See accompanying notes to consolidated financial statements.
72
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(1) Nature of Operations
Stonepath Group, Inc. and subsidiaries (the "Company") is a
non-asset-based third-party logistics services company providing supply
chain solutions on a global basis. A full range of time-definite
transportation and distribution solutions is offered through its Domestic
Services platform, where the Company manages and arranges the movement of
raw materials, supplies, components and finished goods for its customers.
These services are offered through the Company's domestic air and ground
freight forwarding business. A full range of international logistics
services including international air and ocean transportation as well as
customs house brokerage services is offered through the Company's
International Services platform. In addition to these core service
offerings, the Company also provides a broad range of value-added supply
chain management services, including warehousing, order fulfillment and
inventory management. The Company serves a customer base of manufacturers,
distributors and national retail chains through a network of owned offices
in North America and Puerto Rico, strategic locations in Asia and Brazil,
and service partners strategically located around the world.
The Company has experienced losses from operations, and has an accumulated
deficit. In addition the Company has experienced negative cash flow from
operations. In view of these matters, recoverability of a major portion of
the recorded asset amounts shown in the accompanying balance sheet is
dependent upon continued profitable operations of the Company and
generation of cash flow sufficient to meet its obligations. The Company
believes that planned operating improvements and cost reductions and the
availability on its credit facilities will provide the Company with
adequate liquidity to provide uninterrupted support for its business
operations through December 31, 2005.
(2) Summary of Significant Accounting Policies
a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Stonepath Group, Inc., a Delaware corporation, and its wholly- and
majority-owned subsidiaries. All intercompany balances and transactions
have been eliminated in consolidation. The Company's foreign subsidiaries
are included in the consolidated financial statements on a one month lag
to facilitate timely reporting. The Company does not have any variable
interest entities whose financial results are not included in the
consolidated financial statements.
b) Use of Estimates
The preparation of financial statements and related disclosures in
accordance with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Such estimates include revenue recognition, accruals for
the cost of purchased transportation, accounting for stock options, the
assessment of the recoverability of long-lived assets (specifically
goodwill and acquired intangibles), the establishment of an allowance for
doubtful accounts and the valuation allowance for deferred income tax
assets. Estimates and assumptions are reviewed periodically and the
effects of revisions are reflected in the period that they are determined
to be necessary. Actual results could differ from those estimates.
c) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and investments in money
market funds and investment grade securities held with high quality
financial institutions. The Company considers all highly liquid
instruments with a remaining maturity of 90 days or less at the time of
purchase to be cash equivalents.
d) Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash investments and
accounts receivable.
The Company maintains its cash accounts with high quality financial
institutions. With respect to accounts receivable, such receivables are
primarily from manufacturers, distributors and major retailers located
throughout the United States, Asia and South America. Credit is granted to
customers on an unsecured basis, and generally provides for 30-day payment
terms. For the years ended December 31, 2004, 2003 and
73
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
2002, the Company's largest customer, a national retail chain, accounted
for approximately 13%, 24% and 33% of revenue, respectively, and
approximately 5% and 16% of the accounts receivable balance as of December
31, 2004 and 2003, respectively. No other customer accounted for greater
than 10% of revenue. To reduce credit risk, the Company performs ongoing
credit evaluations of its customers' financial conditions. The Company
maintains reserves for specific and general allowances against accounts
receivable. The specific reserves are established on a case-by-case basis
by management. A general reserve is established for all other accounts
receivable, based on a specified percentage of the accounts receivable
balance. Management continually assesses the adequacy of the recorded
allowance for doubtful accounts, based on its knowledge about the customer
base. Credit losses have been within management's expectations.
e) Technology, Furniture and Equipment
Technology, furniture and equipment are stated at cost, less accumulated
depreciation computed on a straight-line basis over the estimated useful
lives of the respective assets. Depreciation is computed using three- to
ten-year lives for furniture and office equipment, a three-year life for
computer software, the shorter of the lease term or useful life for
leasehold improvements and a three-year life for vehicles. Upon retirement
or other disposition of these assets, the cost and related accumulated
depreciation are removed from the accounts and the resulting gain or loss,
if any, is reflected in results of operations. Expenditures for
maintenance, repairs and renewals of minor items are charged to expense as
incurred. Major renewals and improvements are capitalized.
Under the provisions of Statement of Position 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use, the
Company capitalizes costs associated with internally developed and/or
purchased software systems that have reached the application development
stage and meet recoverability tests. Capitalized costs include external
direct costs of materials and services utilized in developing or obtaining
internal-use software, payroll and payroll-related expenses for employees
who are directly associated with and devote time to the internal-use
software project and capitalized interest, if appropriate. Capitalization
of such costs begins when the preliminary project stage is complete and
ceases no later than the point at which the project is substantially
complete and ready for its intended purpose. Costs for general and
administrative, overhead, maintenance and training, as well as the cost of
software that does not add functionality to existing systems, are expensed
as incurred.
f) Goodwill
Goodwill consists of the excess of cost over the fair value of net assets
acquired in business combinations accounted for as purchases (see Note 5).
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. SFAS No.
142 requires an annual impairment test for goodwill and intangible assets
with indefinite lives. Under the provisions of SFAS No. 142, the first
step of the impairment test requires that the Company determine the fair
value of each reporting unit, and compare the fair value to the reporting
unit's carrying amount. To the extent a reporting unit's carrying amount
exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and the Company must perform a second more
detailed impairment assessment. The second impairment assessment involves
allocating the reporting unit's fair value to all of its recognized and
unrecognized assets and liabilities in order to determine the implied fair
value of the reporting unit's goodwill as of the assessment date. The
implied fair value of the reporting unit's goodwill is then compared to
the carrying amount of goodwill to quantify an impairment charge as of the
assessment date. The Company performed its annual impairment test
effective October 1, 2004 and noted no impairment for either of its
reporting units. In the future, the Company will continue to perform the
annual test during its fiscal fourth quarter unless events or
circumstances indicate an impairment may have occurred before that time.
74
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
g) Long-Lived Assets
Acquired intangibles consist of customer related intangibles and
non-compete agreements arising from the Company's acquisitions. Customer
related intangibles are amortized using accelerated methods over five to
seven years and non-compete agreements are amortized using the straight
line method over periods of three to five years.
The Company follows the provisions of SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which establishes accounting
standards for the impairment of long-lived assets such as property, plant
and equipment and intangible assets subject to amortization. The Company
reviews long-lived assets to be held-and-used for impairment whenever
events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable. If the sum of the undiscounted expected
future cash flows over the remaining useful life of a long-lived asset is
less than its carrying amount, the asset is considered to be impaired.
Impairment losses are measured as the amount by which the carrying amount
of the asset exceeds the fair value of the asset. When fair values are not
available, the Company estimates fair value using the expected future cash
flows discounted at a rate commensurate with the risks associated with the
recovery of the asset. Assets to be disposed of are reported at the lower
of carrying amount or fair value less costs to sell.
h) Income Taxes
Taxes on income are provided in accordance with SFAS No. 109, Accounting
for Income Taxes. Deferred income tax assets and liabilities are
recognized for the expected future tax consequences of events that have
been reflected in the consolidated financial statements. Deferred tax
assets and liabilities are determined based on the differences between the
book values and the tax bases of particular assets and liabilities and the
tax effects of net operating loss and capital loss carryforwards. Deferred
tax assets and liabilities are measured using tax rates in effect for the
years in which the differences are expected to reverse. A valuation
allowance is provided to offset the net deferred tax assets if, based upon
the available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized.
i) Revenue Recognition and Purchased Transportation Costs
The Company derives its revenue from three principal sources: freight
forwarding, customs brokerage, and warehousing and other value-added
services.
As a freight forwarder, the Company is primarily a non-asset-based carrier
that does not own or lease any significant transportation assets. The
Company generates the majority of its revenue by purchasing transportation
services from direct (asset-based) carriers and using those services to
provide transportation of property for compensation to its customers. The
Company is able to negotiate favorable buy rates from the direct carriers
by consolidating shipments from multiple customers and concentrating its
buying power, while at the same time offering lower sell rates than most
customers would otherwise be able to negotiate themselves. When acting as
an indirect carrier, the Company will enter into a written agreement with
its customers or issue a tariff and a house bill of lading to customers as
the contract of carriage. When the freight is physically tendered to a
direct carrier, the Company receives a separate contract of carriage, or
master bill of lading. In order to claim for any loss or damage associated
with the freight, the customer is first obligated to pay the freight
charges. Based on the terms in the contract of carriage, revenue related
to shipments where the Company issues a house bill of lading is recognized
when the freight is delivered to the direct carrier at origin. All other
revenue, including revenue for customs brokerage and warehousing and other
value-added services, is recognized upon completion of the service.
At the time of delivery to the direct carrier, the Company records costs
related to the shipment based on estimates of total purchased
transportation costs. The estimates are based upon anticipated margins,
contractual arrangements with direct carriers and other known factors. The
estimates are routinely monitored and compared to actual invoiced costs.
The estimates are adjusted as deemed necessary by the Company to reflect
differences between the original accruals and actual costs of purchased
transportation.
75
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
j) Stock-Based Compensation
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, the
Company has elected to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Accordingly, compensation cost for stock options granted
to employees and members of the board of directors is measured as the
excess, if any, of the quoted market price of the Company's common stock
at the date of the grant over the amount the grantee must pay to acquire
the stock. The Company accounts for stock-based compensation to
non-employees (including directors who provide services outside their
capacity as members of the board) in accordance with SFAS No. 123 and
Emerging Issues Task Force ("EITF") Issue No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services. The Company has implemented
the disclosure provisions of SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure.
The table below illustrates the effect on net income (loss) attributable
to common stockholders and income (loss) per share as if the fair value of
options granted had been recognized as compensation expense in accordance
with the provisions of SFAS No. 123. See Notes 12 and 13 for additional
information regarding options and warrants.
Year ended December 31: 2004 2003 2002
------------- ------------- -------------
Net income (loss) attributable to common stockholders:
As reported $ (13,043,355) $ (785,603) $ 15,473,744
Add: stock-based employee compensation expense included
in reported net income (loss) 21,174 95,232 92,566
Deduct: total stock-based compensation expense
determined under fair value method for all awards (5,848,264) (2,306,736) (1,922,051)
------------- ------------- -------------
Pro forma $ (18,870,445) $ (2,997,107) $ 13,644,259
============= ============= =============
Basic earnings (loss) per common share:
As reported $ (0.33) $ (0.03) $ 0.70
Pro forma (0.48) (0.10) 0.62
Diluted earnings (loss) per common share:
As reported $ (0.33) $ (0.03) $ 0.02
Pro forma (0.48) (0.10) (0.05)
The weighted average fair value of employee options granted during 2004,
2003 and 2002 was $2.16, $1.05 and $0.89 per share, respectively. The fair
value of options granted were estimated on the date of grant using the
Black-Scholes option pricing model, with the following assumptions:
2004 2003 2002
--------- --------- ---------
Dividend yield None None None
Expected volatility 83.8% 55.8% 93.8%
Average risk free interest rate 4.25% 1.56% 1.36%
Average expected lives 9.3 years 6.9 years 6.8 years
76
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
k) Restructuring Charges
The Company accounts for restructuring charges in accordance with SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities"
and SFAS No. 144. SFAS No. 146 requires that a liability for costs
associated with an exit or disposal activity be recognized when the
liability is incurred.
l) 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 7,799,763, 7,443,299 and 1,336,825 for the years ended December
31, 2004, 2003 and 2002, respectively.
The following table indicates the calculation of earnings per share
related to continuing operations for the year ended December 31, 2002:
Year ended December 31, 2002:
Income from continuing operations $ 453,596
Less: preferred stock dividend (1,952,892)
Plus: redemption of Series C Preferred Stock in
exchange transaction (see Note 12) 16,973,040
------------
Basic Earnings per Common Share
Income from continuing operations attributable to
common stockholders 15,473,744 22,154,861 $ 0.70
============
Effect of Dilutive Securities
Options and warrants -- 3,331,275
Convertible preferred stock (15,020,148) 3,746,432
------------ ------------
Diluted Earnings Per Common Share
Net income attributable to common stockholders plus
assumed conversions $ 453,596 29,232,568 $ 0.02
============ ============ ============
m) New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB")
revised SFAS No. 123, "Share-Based Payment" ("SFAS No. 123R"), which will
replace SFAS No. 123 and supersede APB Opinion No. 25. SFAS No. 123R will
require compensation cost related to share-based payment transactions to
be recognized in the consolidated financial statements. As permitted by
SFAS No. 123, the Company currently follows the guidance of APB Opinion
No. 25, which allows the use of the intrinsic value method of accounting
to value share-based payment transactions with employees. SFAS No. 123R
requires measurement of the cost of share-based payment transactions to
employees at the fair value of the award on the grant date and recognition
of expense over the requisite service or vesting period. SFAS No. 123R
allows implementation using a modified version of prospective application,
under which compensation expense for the unvested portion of previously
granted awards and all new awards will be recognized on or after the date
of adoption. SFAS No. 123R also allows companies to implement by restating
previously issued financial statements, basing the amounts on the expense
previously calculated and reported in their pro forma footnote disclosures
required under SFAS No. 123. The Company will adopt SFAS No. 123R
77
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
using the modified prospective method beginning July 1, 2005. The impact
of adopting SFAS No. 123R on the Company's consolidated results of
operations is not expected to differ materially from the pro forma
disclosures currently required by SFAS No. 123.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets." This statement addresses the fair value concepts contained in APB
Opinion No. 29, "Accounting for Nonmonetary Transactions" which included
certain exceptions to the concept that exchanges of similar productive
assets should be recorded at the carrying value of the asset relinquished.
SFAS No. 153 eliminates that exception and replaces it with a general
exception for exchanges of nonmonetary assets that lack commercial
substance. Only nonmonetary exchanges in which an entity's future cash
flows are expected to significantly change as a result of the exchange
will be considered to have commercial substance. SFAS No. 153 must be
applied to nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. Adoption of SFAS No. 153 is not expected to
have a significant effect on the Company's financial position, results of
operations or cash flows.
The FASB issued two final FASB Staff Positions ("FSPs") addressing the
financial accounting for certain provisions of the American Jobs Creation
Act of 2004 ("Act"). A provision of the Act allows taxpayers a deduction
equal to a percentage of the lesser of the taxpayer's qualified domestic
production activities income or taxable income, subject to a limitation of
50% of annual wages paid. FSP 109-1, "Application of FASB Statement No.
109, Accounting for Income Taxes, to the Tax Deduction on Qualified
Production Activities Provided by the American Jobs Creation Act of 2004,"
addresses whether the qualified domestic production activities should be
treated as a special deduction or a rate reduction under SFAS No. 109.
Additionally, another provision of the Act provides taxpayers a special,
one-time 85% dividend received deduction for certain foreign earnings that
are repatriated in either a company's first taxable year beginning on or
after the date of the Act's enactment or the last taxable year beginning
before such date. Some companies have requested that clarification be
provided on certain aspects of the repatriation provisions of the Act.
Until these clarifications are made, the Company is unable to conclude
whether it will repatriate earnings or how much that repatriation will be.
(3) Restructuring Charges
In November 2004, the Company commenced a restructuring program,
engineered to accelerate the integration of its businesses and improve the
Company's overall profitability. During the first half of 2005, the
Company will consolidate its corporate headquarters and the domestic and
international divisional headquarters into one central management facility
in Seattle, Washington. This streamlining will eliminate unnecessary
duplication of efforts as well as provide a much more cohesive day to day
management coordination capability. In addition, the restructuring
initiative includes the rationalization of technology systems, personnel
and facilities. In connection with this plan, the Company recorded pre-tax
restructuring charges of $4,368,250 for the year ended December 31, 2004.
The pre-tax restructuring charges are composed of:
Liability
Balance,
Restructuring Non-Cash Cash December 31,
Charges Charges Payments 2004
------------- ------------ ------------ ------------
Systems $ 3,556,134 $ (3,556,134) $ -- $ --
Personnel 666,408 -- -- 666,408
Lease terminations:
Building 75,229 -- -- 75,229
Truck 70,479 -- (70,479) --
------------ ------------ ------------ ------------
$ 4,368,250 $ (3,556,134) $ (70,479) $ 741,637
============ ============ ============ ============
The systems charges relate to impairment of the Company's corporate
freight software systems in 2004 which were in development. The personnel
charges relate to corporate contractual obligations incurred in 2004 with
certain
78
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
former executives. The lease terminations relate to vacating certain
Domestic facilities in 2004 and the cancellation of truck leases in 2004.
Except for the systems charges, all restructuring charges will result in
cash outflows. The Company expects to complete its restructuring
activities by the end of the second quarter of 2005 and anticipates that
additional costs of approximately $3,000,000 will be incurred.
(4) Discontinued Operations
On December 28, 2001, the Board of Directors approved a plan to dispose of
all of the assets related to the Company's former business of investing in
early-stage technology companies, since these investments were
incompatible with the Company's current strategy of building a global
integrated logistics services organization. Therefore, for financial
reporting purposes, results of operations and cash flows of the former
business have been segregated from those of the continuing operations and
are presented in the Company's consolidated financial statements as
discontinued operations. The Company never recognized any revenue from its
former business model. At December 31, 2004 and 2003, there were no assets
or liabilities of the discontinued operations remaining on the Company's
consolidated balance sheets.
During the second quarter of 2003, the Company recorded a liability for
$135,000 related to services rendered in 2000 by a consultant. The
liability was satisfied in the third quarter of 2003 through the issuance
of common stock. Also during the second quarter of 2003, a subtenant
defaulted on the payment of sublease rentals related to a property
occupied by the Company's former business. The Company recorded a
liability for the remaining rental payments and recognized a loss of
approximately $239,000. During the fourth quarter of 2003, the Company
entered into a new sublease agreement and reduced the rental liability by
approximately $92,000, which represents the amount of rentals to be
received under the new agreement. The total loss recognized related to
discontinued operations in 2003, net of income taxes, amounts to
approximately $263,000, and is reflected as loss from discontinued
operations in the accompanying consolidated statement of operations for
the year ended December 31, 2003.
The Company settled the suit brought by Emergent Capital Investment LLC in
the United States District Court for the Southern District of New York in
exchange for the payment by the Company of $50,000. The settlement, net of
insurance recoveries amounting to $25,000, is included in loss from
discontinued operations in the consolidated statement of operations for
the year ended December 31, 2004.
(5) Acquisitions
On February 9, 2004, the Company acquired, through its indirect
wholly-owned subsidiary, Stonepath Holdings (Hong Kong) Limited, a 55%
interest in Shaanxi Sunshine Cargo Services International Co., Ltd.
("Shaanxi"). Shaanxi is a Class A licensed freight forwarder headquartered
in Shanghai, PRC and provides a wide range of customized transportation
and logistics services and supply chain solutions, including global
freight forwarding, warehousing and distribution, shipping services and
special freight handling. As consideration for the purchase, which was
effective as of March 1, 2004, the Company paid $5,500,000 consisting of
$3,500,000 in cash, financed through its revolving credit agreement, and
$2,000,000 of the Company's common stock. The common shares issued in the
transaction are subject to a one-year restriction on sale and are subject
to a pro rata forfeiture based upon a formula that compares the actual
pre-tax income of Shaanxi through December 31, 2004 with the targeted
level of income of $4,000,000 (on an annualized basis). Also, if the
trading price of the Company's common stock is less than $3.17 per share
at the end of the one-year restriction, the Company will issue up to
169,085 additional shares to the seller. Because the common shares issued
in connection with this transaction are subject to forfeiture, they are
accounted for as contingent consideration. When the number of common
shares to be retained by the seller is ultimately determined, such shares
will be valued at their then fair value and will result in additional
goodwill being recorded. Based upon the actual pre-tax income through
December 31, 2004, the seller forfeited 37,731 shares of common stock. As
provided for in the purchase agreement, the amount of $119, 608, which
represents the original fair value of the forfeited shares at the date of
acquisition, will be added ratably to the future earn-outs. Because the
quoted market price of the Company's common stock was less than $3.17 on
February 9, 2005, the Company will issue 158,973 additional shares of its
common stock. As of February 9, 2005, the Company has issued 752,157
shares of its common stock in connection with this transaction. The
Company will record additional goodwill amounting to $752,157 in the first
quarter of
79
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
2005. The seller may receive additional consideration of up to $5,619,608
under an earn-out arrangement payable at the rate of $1,100,000 in the
first year and $1,254,902 per year over the next four years based on the
future financial performance of Shaanxi.
In addition, the Company agreed to pay the seller 55% of Shaanxi's
accounts receivable balances, net of assumed liabilities (the "Effective
Date Net Accounts Receivable"), existing on the date of acquisition
realized in cash within 180 days following the acquisition with a targeted
distribution date in August 2004. Effective September 20, 2004, the
Company amended the purchase agreement for a change in the settlement date
from August 2004 to an initial payment of $1,045,000 on or before November
15, 2004, and the final payment of $868,000 on or before March 31, 2005.
The amendment also fixed the date of distribution for collections in cash
after the initial 180 day working capital assessment period from being due
when collected to March 31, 2005. On March 21, 2005, the Company and the
seller entered into a financing arrangement whereby the amount due on
March 31, 2005 would become subject to a note payable due March 31, 2006
with interest at 10% per annum. Due to this financing arrangement, the
balance due to the seller amounting to $1,897,539 is included in the other
long-term liabilities in the consolidated balance sheet at December 31,
2004.
The acquisition, which significantly enhances the Company's presence in
the region, was accounted for as a purchase and accordingly, the results
of operations and cash flows of Shaanxi have been included in the
Company's consolidated financial statements prospectively from the date of
acquisition. Because the Company consolidates its foreign subsidiaries on
a one-month lag, such information has been reflected in the consolidated
statement of operations effective for periods subsequent to April 1, 2004.
At December 31, 2004, the total purchase price, including acquisition
expenses of $269,000, but excluding the contingent consideration, was
$6,650,000. The following table summarizes the allocation of the purchase
price based on the fair value of the assets acquired and liabilities
assumed at March 1, 2004 (in thousands):
Current assets $ 15,090
Furniture and equipment 157
Goodwill 2,161
Other intangible assets 1,453
--------
Total assets acquired 18,861
Current liabilities assumed (9,727)
Minority interest (2,484)
--------
Net assets acquired $ 6,650
========
80
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
The acquired intangible assets have a weighted average life of 6.6 years.
The intangible assets include a customer related intangible of $1,112,100
with a 7.1 year life and a covenant-not-to-compete of $341,000 with a five
year life. The $2,161,100 of goodwill was assigned to the Company's
International Services business unit and is not deductible for income tax
purposes.
The following unaudited pro forma information is presented as if the
acquisition of Shaanxi had occurred on December 1, 2002, using the
one-month lag consolidation policy (in thousands, except earnings per
share):
Year ended December 31,
-------------------------
2004 2003
--------- ---------
Total revenue $ 391,637 $ 287,785
Loss from continuing operations (12,245) (56)
Net loss (12,295) (56)
Earnings per share:
Basic $ (0.31) $ (0.01)
Diluted $ (0.31) $ (0.01)
(6) Acquired Intangible Assets
Information with respect to acquired intangible assets is as follows:
December 31,
--------------------------------------------------------------
2004 2003
---------------------------- ----------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
----------- ------------ ----------- ------------
Amortizable intangible assets:
Customer related $11,042,100 $ 4,813,229 $ 8,970,000 $ 2,923,033
Covenants-not-to-compete 1,506,000 654,885 1,119,000 390,074
----------- ----------- ----------- -----------
Total $12,548,100 $ 5,468,114 $10,089,000 $ 3,313,107
=========== =========== =========== ===========
Aggregate amortization expense:
For the year ended December 31, 2004 $ 2,282,887
For the year ended December 31, 2003 1,615,662
For the year ended December 31, 2002 1,404,778
Estimated aggregate amortization expense:
For the year ended December 31, 2005 $ 1,859,000
For the year ended December 31, 2006 1,547,000
For the year ended December 31, 2007 1,254,000
For the year ended December 31, 2008 931,000
For the year ended December 31, 2009 607,000
81
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(7) Technology, Furniture and Equipment
Technology, furniture and equipment consists of the following:
December 31,
-------------------------------
2004 2003
------------ ------------
Furniture and office equipment $ 6,105,146 $ 3,396,048
Computer software 3,845,479 5,006,495
Leasehold improvements 1,037,696 593,425
Vehicles 241,179 62,334
------------ ------------
11,229,500 9,058,302
------------ ------------
Less: accumulated depreciation (3,633,641) (1,995,346)
------------ ------------
$ 7,595,859 $ 7,062,956
============ ============
(8) Credit Facilities
In May 2002, the Company secured a $15,000,000 revolving credit facility
(the "U.S. Facility") which was increased to $20,000,000 during 2003 and
to $25,000,000 in 2004. The U.S. Facility is collateralized by accounts
receivable and other assets of the Company and its subsidiaries. Under the
original U.S. Facility, the Company had the option to elect to pay
interest at a rate equal to LIBOR plus 2.25% or the prime rate. The
Company also paid a commitment fee of 0.5% per annum on the average unused
balance of the U.S. Facility. The Company could use advances under the
U.S. Facility to finance future acquisitions, capital expenditures or
other corporate purposes. Borrowings under the original U.S. Facility
could be limited based upon measures of the Company's cash flow, as well
as a covenant that limited funded debt (the "Funded Debt Covenant") to a
multiple of consolidated earnings before interest, taxes, depreciation and
amortization ("EBITDA") generated from the operations of the United States
subsidiaries. At December 31, 2004, the outstanding balance on the U.S.
Facility was $13,911,700; based on available collateral and an outstanding
$150,000 letter of credit commitment, there was $7,565,700 available for
borrowing under the U.S. Facility.
On July 28, 2004, the Company amended its U.S. Facility to provide a
bridge loan with a principal amount of $5,000,000, a term of 120 days and
interest at 200 basis points above the prime rate. The amendment modified
certain financial covenants, including but not limited to, cash flow
coverage ratio test, funded debt limitations and domestic and worldwide
funded debt to consolidated EBITDA. The Company borrowed the full
$5,000,000 available under the bridge loan on August 24, 2004 and
subsequently repaid the bridge loan facility by November 26, 2004.
The Company restated its consolidated financial statements as of December
31, 2003 and 2002 and for each of the years in the three-year period ended
December 31, 2003, which resulted in the technical default of certain
financial covenants of the U.S. Facility, as amended. These defaults were
waived and the Company entered into a further amended revolving credit
facility, dated November 17, 2004. This amendment reduced the U.S.
Facility term from May 15, 2007 to January 31, 2006, reduced the maximum
availability under the U.S. Facility from $25,000,000 to $22,500,000,
established minimum quarterly EBITDA targets for the Company and defined
segments commencing in the quarter ended December 31, 2004, precluded
acquisitions, eliminated LIBOR based borrowings, fixed the interest rate
at the lender's prime rate plus 200
82
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
basis points and imposed semi-annual fees of approximately $125,000, among
other changes to the agreement. At December 31, 2004, the Company was in
default of the EBITDA target for the quarter ended December 31, 2004, and,
as a result of a cross default provision, the Company was in default of
its Master Lease Agreement dated June 6, 2003. On March 16, 2005, these
defaults were waived by the lender and lessor; however, future lease
payments to July 1, 2006 under the Master Lease Agreement have been
accelerated to March 31, 2005. Accordingly, the consolidated balance sheet
at December 31, 2004 reflects all future payments under the Master Lease
Agreement as current liabilities. See also Note 18 for additional
information about the U.S. Facility.
Effective October 27, 2004, a subsidiary of the Company, Stonepath
Holdings (Hong Kong) Limited ("Asia Holdings") entered into a Term Credit
Agreement with Hong Kong Central League Credit Union (the "Lender") and
SBI Advisors, LLC, as agent for the Lender. The Term Credit Agreement
provides Asia Holdings with the right to borrow an initial amount of
$3,000,000 and up to an additional $7,000,000 upon the satisfaction of
certain conditions. The obligations of Asia Holdings under the Term Credit
Agreement are secured by floating charges on the foreign accounts
receivable of three of its subsidiaries, Planet Logistics Express
(Singapore) Pte. Ltd., GLink Express (Singapore) Pte. Ltd., and Stonepath
Logistics (Hong Kong) Limited. Asia Holdings borrowed $3,000,000 on
November 4, 2004 and $2,000,000 on February 16, 2005. There is no
assurance that the remaining $5,000,000 will be available to Asia Holdings
under the Term Credit Agreement. All borrowings under the Term Credit
Agreement bear interest at an annual rate of 15% and must be repaid on or
before November 4, 2005. The obligation to repay the borrowings under the
Term Credit Agreement may be accelerated by the Lender upon the occurrence
of events of default customary for loan transactions. Stonepath Group,
Inc. has guaranteed the obligations of Asia Holdings under the Term Credit
Agreement. The outstanding balance on the Term Credit Agreement was
$3,000,000 at December 31, 2004.
During the year ended December 31, 2004 and 2003, the Company incurred
interest costs of $701,391 and $189,359, respectively, of which $61,900
and $47,500, respectively, was capitalized.
83
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(9) Income Taxes
Deferred tax assets and liabilities are determined based upon the
estimated future tax effects of temporary differences between the
financial statement and tax bases of assets and liabilities, as well as
for operating and capital loss carryforwards, using the current enacted
tax rates. Deferred income tax assets and liabilities are classified as
current and noncurrent based on the financial reporting classification of
the related assets and liabilities that give rise to the temporary
difference. The tax effects of temporary differences that give rise to the
Company's deferred tax accounts are as follows:
December 31,
-------------------------------
2004 2003
------------ ------------
Deferred tax assets:
Accruals $ 527,000 $ 191,000
Equity in losses of affiliate companies 373,000 384,000
Depreciation and amortization 422,000 616,000
Deferred compensation and warrants 1,403,000 3,044,000
Capital loss carryforward 2,137,000 2,201,000
Federal and state deferred tax benefits
arising from net operating loss carryforwards 18,220,000 9,550,000
------------ ------------
Total gross deferred tax assets 23,082,000 15,986,000
Less: valuation allowance (23,082,000) (15,986,000)
------------ ------------
Net total deferred tax assets -- --
------------ ------------
Deferred tax liabilities:
Amortization of goodwill for tax purposes (1,600,900) (985,600)
Foreign taxes (50,000) (50,000)
------------ ------------
Total gross deferred tax liabilities (1,650,900) (1,035,600)
------------ ------------
Net deferred tax liabilities $ (1,650,900) $ (1,035,600)
============ ============
The Company has not recorded deferred income taxes on the undistributed
earnings of its foreign subsidiaries because it is management's intention
to reinvest such earnings for the foreseeable future. At December 31,
2004, the undistributed earnings of the foreign subsidiaries amounted to
approximately $2,268,000. Upon distribution of these earnings in the form
of dividends or otherwise, the Company may be subject to U.S. income taxes
and foreign withholding taxes. It is not practical, however, to estimate
the amount of taxes that may be payable on the eventual remittance of
these earnings.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which the temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies
in making this assessment. Based upon the level of historical taxable
income and projections for future taxable income, management believes that
a valuation allowance against the gross deferred tax assets is
appropriate.
The net change in the valuation allowance for the years ended December 31,
2004 and 2003 was an increase of $7,096,000 and a decrease of $6,042,000,
respectively. The increase in 2004 was principally due to the increase in
the amount of the deferred tax asset related to the Company's net
operating loss carryforward. The decrease in 2003 was principally due to a
reduction in the amount of the deferred tax asset related to stock-based
compensation. As of December 31, 2004, the Company had net operating loss
carryforwards for federal and state income tax purposes amounting to
approximately $47,000,000 and $50,000,000, respectively. The federal net
operating loss carryforwards expire beginning 2018 through 2024, and the
state net operating loss carryforwards expire beginning in 2005. The use
of certain net operating losses may be subject to annual limitations based
on changes in the ownership of the Company's common stock, as defined by
Section 382 of the Internal Revenue Code.
84
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
Income tax expense attributable to continuing operations is as follows:
Years ended December 31,
------------------------------------------
2004 2003 2002
---------- ---------- ----------
Current:
Federal $ -- $ -- $ --
State 109,337 40,000 30,000
Foreign 1,671,175 121,086 1,877
---------- ---------- ----------
1,780,512 161,086 31,877
---------- ---------- ----------
Deferred:
Federal 572,600 448,800 309,500
State 42,700 76,000 79,800
Foreign -- 50,000 --
---------- ---------- ----------
615,300 574,800 389,300
---------- ---------- ----------
$2,395,812 $ 735,886 $ 421,177
========== ========== ==========
In addition to the amounts reflected above, an income tax benefit of
approximately $19,000 has been allocated to discontinued operations for
the year ended December 31, 2003.
The following table reconciles income taxes based on the U.S. statutory
tax rate to the Company's income tax expense related to continuing
operations.
Years ended December 31,
----------------------------------------
2004 2003 2002
-------- -------- --------
Tax at statutory rate 34.0% 34.0% 34.0%
Amortization of goodwill (6.2) 112.0 35.4
Change in valuation allowance (50.7) 22.5 (44.0)
State taxes (1.3) 29.0 12.5
Effect of tax rates of foreign subsidiaries (0.7) (39.1) (0.2)
Non-deductible items (1.1) 25.3 10.4
-------- -------- --------
Income tax expense (26.0)% 183.7% 48.1%
======== ======== ========
(10) Commitments
Employment Agreements
At December 31, 2004, the Company had employment agreements with three of
its officers for an aggregate annual base salary of $810,000 plus bonus
and increases in accordance with the terms of the agreements. The
contracts are for varying terms through October 2009.
85
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
Leases
The Company leases equipment, office and warehouse space under operating
leases expiring at various times through 2010. During 2004, the Company
entered into various capital leases aggregating $458,408 for certain
equipment utilized in its Domestic Services segment. During 2003, the
Company entered into a capital lease for certain technology and hardware
related to its Tech-Logis(TM) project. Total rent expense for the years
ended December 31, 2004, 2003 and 2002 was $9,150,000, $7,451,000 and
$4,750,000, respectively. Future minimum lease payments are as follows:
Operating Leases
Year ending December 31, Third-party Related Party Total Capital Lease
------------------------------------------------- ----------- ----------------- ----------- -------------
2005 $ 8,578,000 $ 94,000 $ 8,672,000 $ 914,491
2006 5,792,000 -- 5,792,000 604,507
2007 3,862,000 -- 3,862,000 85,891
2008 2,868,000 -- 2,868,000 --
2009 1,952,000 -- 1,952,000 --
Thereafter 1,516,000 -- 1,516,000 --
----------- ----------- ----------- -----------
Total minimum lease payments $24,568,000 $ 94,000 $24,662,000 1,604,888
=========== =========== ===========
Less: Amount representing interest 94,427
-----------
Present value of minimum lease payments 1,510,461
Less: Current portion of capital lease obligation 1,510,461
-----------
Long-term portion of capital lease obligation $ --
===========
Property under capital leases consists of the following:
December 31,
---------------------------
2004 2003
--------- -----------
Software $ -- $ 2,049,638
Equipment 458,409 --
Accumulated amortization (119,397) --
--------- -----------
$ 339,012 $ 2,049,638
========= ===========
Employee Benefit Plan
The Company sponsors voluntary defined contribution savings plans covering
all U.S. employees. Company contributions are discretionary. For the years
ended December 31, 2004, 2003 and 2002, total Company contributions
amounted to $629,000, $547,000 and $260,000, respectively.
(11) Contingencies
Acquisition Agreements
Assuming minimum pre-tax income levels are achieved by the acquired
companies, the Company will be required to make future contingent
consideration payments by April 1 of the respective year as follows (in
thousands):
2006 2007 2008 2009 Total
--------- --------- --------- --------- ---------
Earn-out payments:
Domestic $ 8,050 $ 2,500 $ 2,500 $ -- $ 13,050
International 5,131 5,503 3,769 3,417 17,820
--------- --------- --------- --------- ---------
Total earn-out
Payments $ 13,181 $ 8,003 $ 6,269 $ 3,417 $ 30,870
========= ========= ========= ========= =========
Prior year pre-tax earnings targets (3)
Domestic $ 12,306 $ 3,500 $ 3,500 $ -- $ 19,306
International 12,446 13,502 8,840 7,723 42,511
--------- --------- --------- --------- ---------
Total pre-tax earnings targets $ 24,752 $ 17,002 $ 12,340 $ 7,723 $ 61,817
========= ========= ========= ========= =========
Domestic 65.4% 71.4% 71.4% -- 67.6%
International 41.2% 40.8% 42.6% 44.2% 41.9%
Combined 53.3% 47.1% 50.8% 44.2% 49.9%
- ----------
(1) Excludes the impact of prior year's pre-tax earnings carryforwards (excess
or shortfalls versus earnings targets).
(2) During the 2005-2008 earn-out period, there is an additional contingent
obligation related to tier-two earn-outs that could be as much as $18.0
million if certain of the acquired companies generate an incremental $37.0
million in pre-tax earnings.
(3) Aggregate pre-tax earnings targets as presented here identify the uniquely
defined earnings targets of each acquisition and should not be interpreted
to be the consolidated pre-tax earnings of the Company which would give
effect for, among other things, amortization or impairment of intangible
assets created in connection with each acquisition or various other
expenses which may not be charged to the operating groups for purposes of
calculating earn-outs.
86
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
Legal Proceedings
The Company was named as a defendant in eight purported class action
complaints filed in the United States Court for the Eastern District of
Pennsylvania between September 24, 2004 and November 19, 2004. Also named
as defendants in these lawsuits were officers Dennis L. Pelino and Thomas
L. Scully and former officer Bohn H. Crain. These cases have now been
consolidated for all purposes in that Court under the caption In re
Stonepath Group, Inc. Securities Litigation, Civ. Action No. 04-4515 and
the lead plaintiff, Globis Capital Partners, LP, filed an amended
complaint in February 2005. The lead plaintiff seeks to represent a class
of purchasers of the Company's shares between March 29, 2002 and September
20, 2004, and allege claims for securities fraud under Sections 10(b) and
20(a) of the Securities Exchange Act of 1934. These claims are based upon
the allegation that certain public statements made during the period from
March 29, 2002 through September 20, 2004 were materially false and
misleading because they failed to disclose that the Company's Domestic
Services operations had improperly accounted for accrued purchased
transportation costs. The plaintiffs are seeking compensatory damages,
attorneys' fees and costs, and further relief as may be determined by the
Court. The Company and the individual defendants believe that the
plaintiffs' claims are without merit and intend to vigorously defend
against them.
The Company has been named as a nominal defendant in a shareholder
derivative action on behalf of the Company that was filed on October 12,
2004 in the United States District Court for the Eastern District of
Pennsylvania under the caption Ronald Jeffrey Neer v. Dennis L. Pelino, et
al., Civ. A. No. 04-cv-4971. Also named as defendants in the action are
all of the individuals who were serving as directors of the Company when
the complaint was filed (Dennis L. Pelino, J. Douglas Coates, Robert
McCord, David R. Jones, Aloysius T. Lawn and John H. Springer), former
directors Andrew Panzo, Lee C. Hansen, Darr Aley, Stephen George, Michela
O'Connor-Abrams and Frank Palma, officer Thomas L. Scully and former
officers Bohn H. Crain and Stephen M. Cohen. The derivative action alleges
breach of fiduciary duty, abuse of control, gross mismanagement, waste of
corporate assets, unjust enrichment and violations of the Sarbanes-Oxley
Act of 2002. These claims are based upon the allegation that the
defendants knew or should have known that the Company's public filings for
fiscal years 2001, 2002 and 2003 and for the first and second quarters of
fiscal year 2004, and certain press releases and public statements made
during the period from January 1, 2001 through August 9, 2004, were
materially misleading. The complaint alleges that the statements were
materially misleading because they understated the Company's accrued
purchase transportation liability and related costs of transportation in
violation of generally accepted accounting principles and they failed to
disclose that the Company lacked internal controls. The derivative action
seeks compensatory damages in favor of the Company, attorneys' fees and
costs, and further relief as may be determined by the Court. The
defendants believe that this action is without merit, have filed a motion
to dismiss this action, and intend to vigorously defend themselves against
the claims raised in this action.
By letter dated March 25, 2005, the court-appointed receiver (the
"Receiver") of Lancer Management Group, LLC and certain related parties
asserted that he has determined that payments made by Lancer Partners,
L.P. totaling $3,000,000 and payments made by related entities totaling
$5,349,000 were avoidable as fraudulent transfers. Lancer Partners, L.P.
and certain related entities purchased securities of the Company in past
private placement transactions. The letter provides no basis for the
Receiver's determination and seeks evidence from the Company establishing
that the payments are not avoidable or the payment of $8,349,000. The
Company is in the process of reviewing the transactions identified in the
Receiver's letter.
On October 22, 2004, Douglas Burke filed a two-count action against United
American Acquisitions, Inc. ("UAF"), Stonepath Logistics Domestic
Services, Inc., and the Company in the Circuit Court for Wayne County,
Michigan. Mr. Burke is the former President and Chief Executive Officer of
UAF. The Company purchased the stock of UAF from Mr. Burke on May 30, 2002
pursuant to a Stock Purchase Agreement. At the closing of the transaction
Mr. Burke received $5,100,000 and received the right to receive an
additional $11,000,000 in four annual installments based upon UAF's
performance in accordance with the Stock Purchase Agreement. Subject to
the purchase, Stonepath Logistics Domestic Services, Inc. and Mr. Burke
entered into an Employment Agreement. Mr. Burke's complaint alleges that
the defendants breached the terms of the Employment Agreement and Stock
Purchase Agreement and seeks, among other things, the production of
financial information, unspecified damages, attorney's fees and interest.
The defendants
87
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
believe that Mr. Burke's claims are without merit and intend to vigorously
defend against them. In addition, the Company is seeking $456,000 in
excess earn-out payments that were paid to Mr. Burke.
The Company is not able to predict the outcome of any of the foregoing
litigation at this time, since each action is in an early stage. An
adverse determination in any of those actions could have a material and
adverse effect on the Company's financial position, results of operations
and/or cash flows.
The Company has received notice that the Securities and Exchange
Commission ("Commission") is conducting an informal inquiry to determine
whether certain provisions of the federal securities laws have been
violated in connection with the Company's accounting and financial
reporting. As part of the inquiry, the staff of the Commission has
requested information relating to the restatement amounts, personnel at
the Air Plus subsidiary and Stonepath Group, Inc. and additional
background information for the period from October 5, 2001 to December 2,
2004. The Company is voluntarily cooperating with the staff.
The Company settled the suit brought by Emergent Capital Investment LLC in
the United States District Court for the Southern District of New York in
exchange for the payment by the Company of $50,000. The settlement, net of
insurance recoveries amounting to $25,000, is included in loss from
discontinued operations in the consolidated statement of operations for
the year ended December 31, 2004.
On May 6, 2003, the Company elected to settle litigation instituted on
August 20, 2000 by Austost Anstalt Schaan, Balmore Funds, S.A. and Amro
International, S.A. Although the Company believed that the plaintiffs'
claims were without merit, the Company chose to settle the matter in order
to avoid future litigation costs and to mitigate the diversion of
management's attention from operations. The total settlement costs of
$787,500, paid $437,500 in cash and $350,000 in shares of the Company's
common stock, are included in litigation and nonrecurring costs in the
accompanying consolidated statement of operations for the year ended
December 31, 2003.
The Company is also involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of management,
the ultimate disposition of those matters will not have a material adverse
effect on the Company's consolidated financial position, results of
operations or liquidity. No accruals have been established for any pending
legal proceedings.
(12) Stockholders' Equity
The Company has two classes of authorized stock: common stock and
preferred stock.
a) Common Stock
The Company is authorized to issue 100,000,000 shares of common stock, par
value $.001 per share. The holders of common stock are entitled to one
vote per share and are entitled to dividends as declared. Dividends are
subject to the preferential rights of the holders of the Company's
preferred stock. The Company has never declared dividends on its common
stock.
In March 2003, the Company completed a private placement of 4,470,000
shares of its common stock at a price of approximately $1.35 per share
realizing gross proceeds of $6,072,500. This placement yielded net
proceeds of $5,512,468 for the Company, after the payment of placement
agent fees and other out-of-pocket costs associated with the placement.
In October 2003, the Company completed a private placement of 5,983,500
shares of its common stock at a price of $2.20 per share realizing gross
proceeds of $13,163,700. This placement yielded net proceeds of
$12,552,947 for the Company, after the payment of placement agent fees and
other out-of-pocket costs associated with the placement.
On February 9, 2004 the Company filed a shelf registration statement with
the Commission. This registration statement, filed on Form S-3, had been
declared effective, and permitted the Company to sell,
88
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
in one or more public offerings, shares of common stock, preferred stock,
or warrants for proceeds of up to an aggregate amount of $50,000,000. In
view of the Company's late filing of its Form 10-Q for the three and nine
month periods ending September 30, 2004, the aforementioned Form S-3 is
not available for use by the Company at this time.
b) Preferred Stock
The Company's Board of Directors has the authority, without further action
by the stockholders, to issue up to 10,000,000 shares of preferred stock,
par value $.001 per share, that may be issued in one or more series and
with such terms as may be determined by the Board of Directors. At
December 31, 2004, there are no preferred shares of any series
outstanding.
Series C Preferred Stock
In March 2000, the Company completed a private placement transaction in
which it issued 4,166,667 shares of Series C Preferred Stock and warrants
to purchase 416,667 additional shares of common stock for aggregate gross
proceeds of $50,000,000.
The terms of the Series C Preferred Stock initially required the Company
to use the proceeds from this offering solely for investments in early
stage Internet companies. In February 2001, the Company received consents
(the "Consents") from the holders of more than two-thirds of its issued
and outstanding shares of Series C Preferred Stock to modify this
restriction to permit it to use the proceeds to make any investments in
the ordinary course of business, as from time-to-time determined by the
Board of Directors, or for any other business purpose approved by the
Board of Directors.
In exchange for the Consents, the Company agreed to a private exchange
transaction (the "Exchange Transaction") in which it would issue to the
holders of the Series C Preferred Stock as of July 18, 2002 (the
"conversion date"), additional warrants to purchase up to a maximum of
2,692,195 shares of common stock at an exercise price of $1.00 per share,
and reduce the per share exercise price from $26.58 to $1.00 for 307,805
existing warrants owned by the holders of the Series C Preferred Stock. As
a condition to receiving the additional warrants and having their existing
warrants re-priced, the holders of the Series C Preferred Stock agreed to
convert their shares of preferred stock into shares of common stock on the
conversion date.
At the request of the largest holder of Series C Preferred Stock (because
of legal limitations in its governing instruments which prevented it from
holding investments in common stock), the Company expanded the Exchange
Transaction to include an additional alternative. Holders of the Series C
Preferred Stock as of the conversion date were provided with the
alternative of exchanging the common stock issuable upon conversion of the
Series C Preferred Stock, the additional warrants and re-priced warrants,
for shares of a newly designated Series D Convertible Preferred Stock.
As a result of the exercise of these rights by the holders of the Series C
Preferred Stock, as of July 19, 2002, all of the Company's shares of
Series C Preferred Stock, representing approximately $44,600,000 in
liquidation preferences, together with warrants to purchase 307,805 shares
of the Company's common stock, were surrendered and retired in exchange
for a combination of securities consisting of:
o 1,911,071 shares of common stock;
o 1,543,413 warrants to purchase common stock at an exercise price of
$1.00; and
o 360,745 shares of Series D Convertible Preferred Stock.
The 1,911,071 shares of common stock and the 1,543,413 warrants to
purchase shares of common stock at an exercise price of $1.00 were issued
in exchange for 1,911,071 shares of Series C Preferred Stock and
89
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
warrants to purchase 158,349 shares of the Company's common stock at an
exercise price of $26.58 per share. The exchange of the common stock for
the Series C Preferred Stock was accounted for as a conversion of the
Series C Preferred Stock pursuant to its terms. The estimated fair value
of the additional warrants and the re-priced warrants had been previously
recorded by the Company in 2001 as a dividend, so no further amount was
recorded in 2002.
The remaining 1,803,725 shares of Series C Preferred Stock were converted
into 1,803,725 shares of common stock. In addition, the Company issued
1,307,130 additional warrants to purchase shares of common stock at an
exercise price of $1.00 per share and re-priced 149,457 warrants to
purchase shares of the Company's common stock (the re-priced warrants were
re-priced from an exercise price of $26.58 per share to an exercise price
of $1.00 per share). The common stock, additional warrants and re-priced
warrants were then immediately surrendered by the holders in exchange for
360,745 shares of Series D Convertible Preferred Stock.
EITF Topic D-42, The Effect on the Calculation of Earnings per Share for
the Redemption or Induced Conversion of Preferred Stock, indicates that
the excess of the carrying amount of preferred stock over the fair value
of the consideration transferred to the holders of the preferred stock
should be added to net income. The Series C Preferred Stock which was
converted into Series D Convertible Preferred Stock had a carrying value
of approximately $21,645,000. The Company obtained an independent
appraisal which valued the Series D Convertible Preferred Stock at
approximately $4,672,000. The excess of the carrying value of the Series C
Preferred Stock over the fair value of the Series D Convertible Preferred
Stock was added to net income for purposes of computing net income
attributable to common stockholders for the year ended December 31, 2002.
The Exchange Transaction had no effect on the cash flows of the Company.
The holders of the Series C Preferred Stock earned 162,741 additional
shares of Series C Preferred Stock from payment of preferred stock
dividends during the year ended December 31, 2002.
Series D Convertible Preferred Stock
Each share of the Series D Convertible Preferred Stock was convertible
into ten shares of common stock of the Company. The conversion terms were
negotiated to be similar to the terms of the Exchange Transaction. During
the years ended December 31, 2004 and 2003, 310,477 shares and 50,265
shares, respectively, of Series D Convertible Preferred Stock were
converted into 3,104,770 shares and 502,650 shares, respectively, of
common stock of the Company.
Preferred Stock Dividends
For the year ended December 31, 2002, the components of the preferred
stock dividends were as follows:
Series C Preferred Stock dividend payable in kind $ (1,952,892)
Non-cash credit: excess of carrying value of Series C
Preferred Stock over the fair value of Series D Convertible
Preferred Stock 16,973,040
------------
$ 15,020,148
============
c) Deferred Stock-Based Compensation
The Company records deferred compensation when it makes restricted stock
awards or compensatory stock option grants to employees and consultants.
In the case of stock option grants to employees, the amount of deferred
compensation initially recorded is the difference, if any, between the
exercise price and quoted market value of the common stock on the date of
grant. Such deferred compensation is fixed and remains unchanged for
subsequent increases or decreases in the market value of the Company's
common stock. In
90
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
the case of options granted to consultants, the amount of deferred
compensation recorded is the fair value of the stock options on the grant
date as determined using a Black-Scholes valuation model. The Company
records deferred compensation as a reduction to stockholders' equity and
an offsetting increase to additional paid-in capital. The Company then
amortizes deferred compensation into stock-based compensation expense over
the performance period, which typically coincides with the vesting period
of the stock-based award of three to four years.
The components of deferred compensation are as follows:
Employees Consultants Total
----------- ----------- -----------
Balance at January 1, 2002 $ 211,638 $ -- $ 211,638
Deferred compensation recorded -- 3,193 3,193
Amortization to stock-based compensation (95,232) (3,193) (98,425)
----------- ----------- -----------
Balance at December 31, 2002 116,406 -- 116,406
Amortization to stock-based compensation (95,232) -- (95,232)
----------- ----------- -----------
Balance at December 31, 2003 21,174 -- 21,174
Deferred compensation recorded -- 70,000 70,000
Amortization to stock-based compensation (21,174) (38,700) (59,874)
----------- ----------- -----------
Balance at December 31, 2004 $ -- $ 31,300 $ 31,300
=========== =========== ===========
Stock-based compensation is included in personnel costs in the
accompanying consolidated statements of operations.
91
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(13) Stock Options and Warrants
a) Stock Options
The Amended and Restated Stonepath Group, Inc. 2000 Stock Incentive Plan,
(the "Stock Incentive Plan") covers 13,000,000 shares of common stock.
Under its terms, employees, officers and directors of the Company and its
subsidiaries are currently eligible to receive non-qualified and incentive
stock options and restricted stock awards. Options granted generally vest
over three to four years and expire ten years following the date of grant.
The Board of Directors or a committee thereof determines the exercise
price of options granted.
The following summarizes the Company's stock option activity and related
information:
Weighted
average
Range of exercise
Shares exercise prices price
--------- --------------- --------
Outstanding at January 1, 2002 6,282,883 $0.50 -17.50 $1.47
Granted 3,648,000 1.30 - 2.30 1.37
Exercised (409,583) 0.50 - 1.00 0.96
Expired (74,400) 0.70 - 1.58 0.98
----------
Outstanding at December 31, 2002 9,447,300 0.50 -17.50 1.46
Granted 1,862,100 1.53 - 2.85 1.95
Exercised (307,916) 0.70 - 1.30 1.04
Expired (273,600) 9.27 -10.00 9.27
Cancelled (123,750) 1.21 - 2.00 1.34
----------
Outstanding at December 31, 2003 10,604,134 0.50 -17.50 1.36
Granted 3,774,700 0.75 - 3.75 2.25
Exercised (2,089,094) 0.60 - 1.38 0.85
Expired (24,000) 2.50 2.50
Cancelled (859,556) 1.30 - 2.85 1.89
----------
Outstanding at December 31, 2004 11,406,184 $0.50 -17.50 $1.70
==========
92
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
The following table summarizes information about options outstanding and
exercisable as of December 31, 2004:
Outstanding Options Exercisable Options
--------------- ----------- ---------------- -------------- ----------- --------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
$0.50 - $1.00 3,895,334 7.0 years $ 0.79 3,157,833 $ 0.80
$1.01 - $2.00 4,189,619 7.5 years 1.47 2,863,412 1.45
$2.01 - $4.00 3,248,031 7.8 years 2.78 1,922,950 2.72
$6.38 10,000 4.5 years 6.38 10,000 6.38
$17.50 63,200 2.7 years 17.50 63,200 17.50
---------- ---------
Total 11,406,184 7.4 years $ 1.70 8,017,395 $ 1.63
========== =========
On October 5, 2001, February 28, 2002 and July 3, 2002, the Company
modified the existing option arrangements with its Chairman such that,
effective as of July 3, 2002, vesting was fully accelerated on options to
purchase 1,800,000 shares of the Company's common stock. Based on the
excess of the trading price of the common stock on the dates of the
modifications over the exercise price, the Company could incur a non-cash
charge to its earnings of approximately $870,000 if the Chairman leaves
the employment of the Company prior to the vesting dates specified in the
original option grant.
b) Warrants
The following summarizes warrant activity and related information:
Range of Weighted Average
Shares Exercise Prices Exercise Price
----------- --------------- --------------
Outstanding at January 1, 2002 3,473,051 $ 0.82 - 26.58 $ 6.67
Issued 1,693,413 1.00 - 1.23 1.02
Exercised (31,225) 1.00 1.00
Expired (1,780,027) 2.40 - 10.00 5.16
Cancelled (407,806) 0.82- 26.58 20.26
-----------
Outstanding at December 31, 2002 2,947,406 1.00 - 26.58 2.51
Issued 297,000 1.49 1.49
Exercised (923,040) 1.00 - 1.49 1.13
Expired (437,970) 6.00 - 26.58 11.12
-----------
Outstanding at December 31, 2003 1,883,396 1.00 - 1.49 1.03
Issued 600,000 5.00 5.00
Exercised (525,612) 1.00 1.00
-----------
Outstanding at December 31, 2004 1,957,784 $1.00 - 5.00 $ 2.26
===========
These warrants were issued primarily in connection with former borrowing
arrangements, the Series C Preferred Stock issuance, the receipt of
consulting services and services to be rendered in connection with a
private placement of the Company's common stock. In 2002, the Company
recorded $95,000 of deferred
93
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
offering costs for warrants that were issued in connection with an
anticipated private placement of the Company's common stock.
(14) Fair Value of Financial Instruments
At December 31, 2004 and 2003, the carrying values of cash and cash
equivalents, accounts receivable, loans receivable, accounts payable and
lines of credit approximated their fair values as they are short-term and
are generally receivable or payable on demand. At December 31, 2004, the
carrying value of the capital leases approximated their fair value, since
they are payable in full on March 31, 2005. Other long-term liabilities
represented amounts payable to the former shareholder of Shaanxi and
approximated their fair value since they are now the subject of a
recently-negotiated note payable, due March 31, 2006.
(15) Related Party Transactions
During 2002, the Company purchased certain computer equipment and
peripherals for $28,000 from a company owned by the Company's Chairman.
During 2002, the Company paid a total of $60,000 to two of its directors
as a placement fee related to the employment of the Company's former Chief
Financial Officer.
During 2003, the Company paid $25,872 for consulting services received
from a company owned by a director.
At December 31, 2003, a former officer was indebted to the Company for a
loan with an aggregate unamortized balance of $14,597. This loan is
generally forgivable over a three-year term and for accounting purposes
was amortized evenly to expense over the term which ended in April 2004.
Certain real estate is leased under an operating lease from the former
principal shareholder of M.G.R., Inc. d/b/a Air Plus, which the Company
acquired on October 5, 2001. Rent under this arrangement was determined by
a survey of comparable building rents and totaled $187,000 for each of the
years ended December 31, 2004, 2003 and 2002.
At December 31, 2004, a former principal shareholder of Global
Transportation Services, Inc., which the Company acquired on April 4,
2003, was indebted to the Company for a loan amounting to $87,500. The
loan is repayable by offset against his portion of the contingent
consideration payment to be made in 2006.
(16) Segment Information
SFAS No 131, Disclosures About Segments of an Enterprise and Related
Information, established standards for reporting information about
operating segments in financial statements. Operating segments are defined
as components of an enterprise engaging in business activities about which
separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources
and in assessing performance. The Company identifies operating segments
based on the principal service provided by the business unit. The Company
determined that it has two operating segments: the Domestic Services
platform, which provides a full range of logistics and transportation
services throughout North America, and its International Services
platform, which provides international air and ocean logistics services.
Each segment has a separate management structure. The accounting policies
of the reportable segments are the same as described in Note 2. Segment
information, in which corporate expenses (other than the legal settlement
and nonrecurring costs) have been fully allocated to the operating
segments, is as follows (in thousands):
94
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
Year Ended December 31, 2004
----------------------------------------------------------------
Domestic International
Services Services Corporate Total
----------- ----------- ----------- -----------
Revenue from external customers $ 145,172 $ 221,909 $ -- $ 367,081
Inter-segment revenue 18 350 -- 368
Revenue from significant customer 46,998 -- -- 46,998
Segment operating income (loss) (9,879) 4,303 -- (5,576)
Segment assets 42,278 76,420 4,248 122,946
Segment goodwill 19,641 17,638 -- 37,279
Depreciation and amortization 2,551 1,638 -- 4,189
Capital expenditures 1,887 716 2,765 5,368
Year Ended December 31, 2003
----------------------------------------------------------------
Domestic International
Services Services Corporate Total
----------- ----------- ----------- -----------
Revenue from external customers $ 129,474 $ 90,610 $ -- $ 220,084
Inter-segment revenue 56 124 -- 180
Revenue from significant customer 53,582 _ -- 53,852
Segment operating income (loss) (1,465) 4,312 (1,169) 1,678
Segment assets 49,780 36,577 3,912 90,269
Segment goodwill 19,641 11,868 -- 31,509
Depreciation and amortization 2,259 401 -- 2,660
Capital expenditures 643 140 3,400 4,183
Year Ended December 31, 2002
----------------------------------------------------------------
Domestic International
Services Services Corporate Total
----------- ----------- ----------- -----------
Revenue from external customers $ 78,319 $ 44,469 $ -- $ 122,788
Inter-segment revenue 76 15 -- 91
Revenue from significant customer 40,164 _ -- 40,164
Segment operating income (loss) (1,023) 1,770 747
Segment assets 40,682 13,867 (564) 53,985
Segment goodwill 13,923 5,208 -- 19,131
Depreciation and amortization 2,036 151 -- 2,187
Capital expenditures 788 349 676 1,813
95
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
The revenue in the table below is allocated to geographic areas based upon
the location of the customer (in thousands):
Year Ended December 31,
------------------------------------------
2004 2003 2002
---------- ---------- ----------
Total revenue:
United States $ 239,389 $ 208,591 $ 121,111
Asia 116,388 8,003 1,076
North America (excluding the United States) 220 1,360 55
Europe 6,507 1,287 344
South America 2,605 -- --
Other 1,972 843 202
---------- ---------- ----------
Total $ 367,081 $ 220,084 $ 122,788
========== ========== ==========
The following table presents long-lived assets by geographic area (in
thousands):
December 31,
----------------------
2004 2003
-------- --------
United States $ 6,797 $ 6,737
Asia 691 326
South America 108 --
-------- --------
$ 7,596 $ 7,063
======== ========
Cash on deposit with foreign banks amounted to $6,005,000 at December 31, 2004.
96
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(17) Quarterly Information (Unaudited)
The following is a summary of certain unaudited quarterly financial
information for fiscal 2004 and 2003:
Quarter Ended
------------------------------------------------------------------------
2004 March 31 June 30 September 30 December 31
------------------------------- ------------- ------------- ------------- -------------
Total revenue $ 60,224,390 $ 86,469,712 $ 109,711,414 $ 110,675,149
Cost of transportation 43,472,712 67,404,844 84,638,366 86,842,725
------------- ------------- ------------- -------------
Net revenue $ 16,751,678 $ 19,064,868 $ 25,073,048 $ 23,832,424
============= ============= ============= =============
Income (loss) from continuing
operations $ (5,700,446) $ (1,368,806) $ 105,767 $ (6,054,870)
Gain (loss) from discontinued
operations -- (50,000) 25,000
------------- ------------- ------------- -------------
Net income (loss) attributable
to common stockholders $ (5,700,446) $ (1,368,806) $ 55,767 $ (6,029,870)
============= ============= ============= =============
Loss per common share:
Basic
Continuing $ (0.15) $ (0.03) $ -- $ (0.15)
Discontinued operations -- -- -- --
------------- ------------- ------------- -------------
Earnings per common share $ (0.15) $ (0.03) $ -- $ (0.15)
============= ============= ============= =============
Diluted
Continuing $ (0.15) $ (0.03) $ -- $ (0.15)
Discontinued operations -- -- -- --
------------- ------------- ------------- -------------
Earnings per common share $ (0.15) $ (0.03) $ -- $ (0.15)
============= ============= ============= =============
Quarter Ended
------------------------------------------------------------------------
2003 March 31 June 30 September 30 December 31
------------------------------- ------------- ------------- ------------- -------------
Total revenue $ 38,572,441 $ 46,333,989 $ 65,507,874 $ 69,669,977
Cost of transportation 26,634,489 34,392,588 47,554,483 49,524,035
------------- ------------- ------------- -------------
Net revenue $ 11,937,952 $ 11,941,401 $ 17,953,391 $ 20,145,942
============= ============= ============= =============
Income (loss) from continuing
operations $ (1,656,934) $ (1,792,020) $ 1,307,951 $ 1,618,431
Gain (loss) from discontinued
operations -- (354,991) -- 91,960
------------- ------------- ------------- -------------
Net income (loss) attributable
to common stockholders $ (1,656,934) $ (2,147,011) $ 1,307,951 $ 1,710,391
============= ============= ============= =============
Earnings (loss) per common
share:
Basic
Continuing operations $ (0.07) $ (0.06) $ 0.04 $ 0.05
Discontinued operations -- (0.01) -- --
------------- ------------- ------------- -------------
Earnings per common share $ (0.07) $ (0.07) $ 0.04 $ 0.05
============= ============= ============= =============
Diluted
Continuing operations $ (0.07) $ (0.06) $ 0.03 $ 0.04
Discontinued operations -- (0.01) -- --
------------- ------------- ------------- -------------
Earnings per common share $ (0.07) $ (0.07) $ 0.03 $ 0.04
============= ============= ============= =============
97
STONEPATH GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(18) Subsequent Events
On March 21, 2005, the Company and the former Shaanxi shareholder entered
into a financing agreement whereby the amount payable to the former
shareholder for 55% of Shaanxi's working capital at the date of the
acquisition (approximately $1,900,000) became subject to a note payable
due March 31, 2006 with interest at 10% per annum.
As of March 2, 2005, the Company failed to deliver to the lender a
compliance certificate and certain financial statements as of and for the
period ended January 31, 2005 as required by its U.S. Facility. On March
28, 2005, the Company obtained a waiver of the breach of these covenants
as well as an extension of the term of the agreement from January 31, 2006
to May 31, 2006. The Company incurred a fee of $50,000 in connection with
this waiver. The lender also requires the Company to secure additional
financing of $5,000,000 by April 30, 2005 or have availability under the
U.S. Facility reduced by $250,000 and incur a fee of $100,000. Similar
fees and reductions in availability will occur on each of May 31, 2005,
June 30, 2005, September 30, 2005, December 31, 2005 and March 31, 2006.
If the financing is received, the Company will incur fees of $100,000 and
availability reductions of $250,000 on each of August 31, 2005, November
30, 2005 and February 28, 2006. In connection with the extension of the
term of the loan agreement, the payoff of the leases referred to in Note 8
have been modified from full payment on March 31, 2005 to $438,000 on
March 31, 2005 and the remaining balance of $904,000 on April 30, 2005.
98
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
Stonepath Group, Inc.:
Under date of February 24, 2004, we reported on the consolidated balance sheet
of Stonepath Group, Inc. and subsidiaries as of December 31, 2003, and the
related consolidated statements of operations, stockholders' equity and
comprehensive income (loss) and cash flows for each of the years in the two-year
period ended December 31, 2003. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
financial statement schedule as of and for the years ended December 31, 2003 and
2002, as listed in the accompanying index. This financial statement schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Philadelphia, Pennsylvania
January 31, 2005
99
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
STONEPATH GROUP, INC. AND SUBSIDIARIES
Column C - Additions
------------------------------
(2)
Column B - (1) Charged
Balance at Charged to to other Column D Column E -
Column A - beginning of costs and accounts - Deductions- Balance at
Description period expenses describe describe(a) end of period
- ------------------------------------- ------------ ------------ ------------ ------------ -------------
Allowance for doubtful accounts:
Year ended December 31, 2004 $ 1,055,000 $ 1,838,000 $ -- $ (1,340,000) $ 1,553,000
============ ============ ============ ============ ============
Year ended December 31, 2003 $ 320,000 $ 771,000 $ -- $ (36,000) $ 1,055,000
============ ============ ============ ============ ============
Year ended December 31, 2002 $ 167,000 $ 153,000 $ -- $ -- $ 320,000
============ ============ ============ ============ ============
Reserve for excess earn-out payments:
Year ended December 31, 2004 $ 1,270,141 $ 3,075,190 $ -- $ -- $ 4,345,331
============ ============ ============ ============ ============
Year ended December 31, 2003 $ -- $ 1,270,141 $ -- $ -- $ 1,270,141
============ ============ ============ ============ ============
(a) Represents writeoff of uncollectible accounts receivable.
100
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Philadelphia, Commonwealth of Pennsylvania, on March 31, 2005.
STONEPATH GROUP, INC.
BY: /s/ Jason Totah
--------------------
Jason Totah (Chief Executive Officer)
BY: /s/ Thomas L. Scully
--------------------
Thomas L. Scully (Chief Financial Officer,
Vice President and Controller)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this Annual Report on Form 10-K has been signed by the following persons in the
capacities indicated:
SIGNATURE TITLE DATE
/s/ Dennis L. Pelino Chairman of the Board March 31, 2005
- --------------------
Dennis L.Pelino
/s/ J. Douglass Coates Director March 31, 2005
- ----------------------------
Douglass Coates
/s/ John Springer Director March 31, 2005
- ----------------------------
John Springer
/s/ David R. Jones Director March 31, 2005
- ----------------------------
David R. Jones
/s/ Aloysius T. Lawn, IV Director March 31, 2005
- ----------------------------
Aloysius T. Lawn, IV
/s/ Robert McCord Director March 31, 2005
- ----------------------------
Robert McCord
101