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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 3, 2004
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Commission File No. 0-28452
VELOCITY EXPRESS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 0-28452 87-0355929
(State or other (Commission File (IRS Employer
jurisdiction of Number) Identification No.)
incorporation)
One Morningside Drive North, Bldg. B, Suite 300,
Westport, Connecticut 06880
(Address of Principal Executive Offices) (Zip Code)
(203) 349-4160
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock, par value $0.004 per share.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [_] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [_] No [X]
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common equity,
as of the last business day of the registrant's most recently completed second
fiscal quarter: December 27, 2003: $3,386,179.
As of July 3, 2004, there were 10,284,301 shares of Common Stock of the
registrant issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
PART I. 1........................................................................... 1
ITEM 1 Description of Business.................................................. 1
ITEM 2. Description of Property.................................................. 6
ITEM 3. Legal Proceedings........................................................ 7
ITEM 4. Submission of Matters to a Vote of Security Holders...................... 7
PART II............................................................................. 8
ITEM 5. Market for Common Equity and Related Stockholder Matters................. 8
ITEM 6. Selected Financial Data.................................................. 12
ITEM 7. Management's Discussion and Analysis..................................... 13
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk............... 25
ITEM 8. Financial Statements and Supplementary Data.............................. 26
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................... 55
ITEM 9A. Controls and Procedures.................................................. 55
PART III............................................................................ 56
ITEM 10. Directors and Executive Officers of the Registrant....................... 56
ITEM 11. Executive Compensation................................................... 59
ITEM 12. Security Ownership of Certain Beneficial Owners and Management........... 66
ITEM 13. Certain Relationships and Related Transactions........................... 81
ITEM 14. Principal Accounting Fees and Services................................... 83
PART IV............................................................................. 84.
ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......... 84
SIGNATURES.......................................................................... 85
POWER OF ATTORNEY................................................................... 85
FINANCIAL STATEMENT SCHEDULES....................................................... 86
EXHIBIT INDEX....................................................................... 87
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PART I.
Forward-Looking Information
In accordance with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, Velocity Express Corporation (the "Company")
notes that certain statements in this Form 10-K and elsewhere which are
forward-looking and which provide other than historical information, involve
risks and uncertainties that may impact the Company's results of operations.
These forward-looking statements include, among others, statements concerning
the Company's general business strategies, financing decisions, and
expectations for funding capital expenditures and operations in the future.
Additionally, such statements are based, in part, on assumptions made by, and
information currently available to, management, including management's own
knowledge and assessment of the Company, the industry and competition. When
used herein, the words "believe," "plan," "continue," "hope," "estimate,"
"project," "intend," "expect," and similar expressions are intended to identify
such forward-looking statements. Such forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from historical results or from those results presently anticipated
or projected.
Readers are cautioned not to place undue reliance on the forward-looking
statements contained herein, which speak only as of the date hereof. The
information contained in this Form 10-K is believed by the Company to be
accurate as of the date hereof. Changes may occur after that date, and the
Company will not update that information except as required by law in the
normal course of its public disclosure practices.
ITEM 1 DESCRIPTION OF BUSINESS
Company Overview
Velocity Express Corporation (formerly known as United Shipping &
Technology, Inc.) and its subsidiaries are engaged in the business of providing
same-day transportation and distribution/logistics services to individual
consumers and businesses. The Company operates primarily in the United States
with limited operations in Canada. The Company currently operates in a
single-business segment.
The Company has one of the largest nationwide networks of time-critical
logistics solutions in the United States and is a leading provider of
scheduled, distribution and expedited logistics services. Our customers are
comprised of multi-location, blue chip customers with operations in the
commercial & office products, financial, healthcare, transportation &
logistics, technology, and energy sectors.
The Company's service offerings are divided into the following categories:
. Scheduled logistics consisting of the daily pickup and delivery of
parcels with narrowly defined time schedules predetermined by the
customer.
. Distribution logistics consisting of the receipt of customer bulk
shipments that are divided and sorted at major metropolitan locations and
delivered into multiple routes with defined endpoints and more broadly
defined time schedules.
. Expedited logistics consisting of unique and expedited point-to-point
service for customers with extremely time sensitive delivery requirements.
The largest customer base for scheduled logistics consists of financial
institutions that need a wide variety of services including the pickup and
delivery of non-negotiable instruments, primarily canceled checks and ATM
receipts, the delivery of office supplies, and the transfer of inter-office
mail and correspondence. Distribution logistics typically involves receiving
bulk shipments from the customer and dividing and sorting them for delivery to
specific locations. Customers utilizing distribution logistics normally include
pharmaceutical wholesalers, retailers, manufacturers or other companies who
must distribute merchandise every day from a
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single point of origin to many locations within a clearly defined geographic
region. Most expedited logistics services occur within a major metropolitan
area or radius of 40 miles, and the Company usually offers one-hour, two- to
four-hour and over four-hour delivery services depending on the customer's time
requirements. These services are typically available 24 hours a day, seven days
a week. Expedited logistics services also include critical parts management and
delivery for companies.
Acquisition and Integration of Corporate Express Delivery Systems
Effective August 28, 1999, United Shipping & Technology Inc., through a
wholly-owned subsidiary, acquired from CEX Holdings, Inc. ("CEX") all of the
outstanding shares of common stock of Corporate Express Delivery Systems, Inc.
("CEDS"), a provider of same-day delivery solutions. CEDS changed its name to
UST Delivery Systems, Inc., and subsequently changed its name to Velocity
Express, Inc. ("Velocity"). The results of Velocity's operations have been
included in the Company's consolidated financial statements since August 28,
1999.
Immediately after the acquisition of CEDS, the Company initiated various
post-merger integration and consolidation initiatives. In fiscal 2000, the
Company integrated CEDS' management team into its own, resulting in the
elimination of redundant positions and the realignment and "right sizing" of
CEDS' field management structure. Upon the completion of this integration, the
Company then began divesting CEDS' non-core air courier business operations,
with the sale of one of the three acquired air courier operations in June 2000
and the closing or consolidation of unprofitable locations.
In fiscal 2001, the Company divested the second of the three non-core air
courier operations in October 2000 and in the third quarter of fiscal 2001
announced the implementation of a multi-faceted restructuring program allowing
it to accelerate the "right-sizing" of its operations. As a result, the Company
streamlined and downsized its operations by reducing its workforce and
consolidating various locations. The total charge associated with this
restructuring program was $7.1 million consisting of severance costs of $2.2
million, $3.3 million for rental costs associated with the termination of
building leases and location rationalization costs and $1.6 million for the
write off of equipment.
In fiscal 2002, the Company divested its third air courier business
operation in October 2001 and then focused its efforts on increasing the
efficiency of its driver costs through the variable cost delivery model and its
back office processes. In July 2001, Company began the transition to a variable
cost delivery model using independent contractors and employee-owner operators
in greater proportion to employee drivers. This transition resulted in improved
insurance expense and improvement in overall driver and vehicle-related costs.
During the same period the Company began integrating, through technology, all
back office processes into one common platform, which allowed the Company to
eliminate numerous redundant functions within its back office structure.
For further discussion regarding the impact these initiatives had on the
operating performance of the Company, please see additional discussion in the
"Management's Discussion and Analysis" section below.
Industry Overview
The Company operates in the same-day time-critical logistics industry, which
includes scheduled and non-scheduled, same-day transportation of documents and
packages in local and inter-city markets. The industry also provides
warehousing, facilities management and logistics solutions, as well as supply
chain management and cross-dock and package aggregation services.
The Company believes the market for same-day time-critical logistics
solutions is large and growing. Based on industry studies, the U.S. same-day
transportation services market is estimated to generate revenues in excess of
$20 billion per year. Although the market is large, it is highly fragmented.
There are relatively low entry
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barriers in this market as the capital requirements to start a local courier
business are relatively small and the industry is not subject to extensive
regulation. The Company believes there are currently as many as 6,000 same-day
transportation companies in the United States. Most are privately held and
operate only on the local level. The focus is generally on operations, with
little attention given to marketing and sales. Accordingly, the Company
believes there is little perceived service differentiation between competitors,
and that customer loyalty is generally short-term.
There are no dominant brands in the same-day time-critical logistics
industry, and there is a relatively basic level of technology usage. By
contrast, the next-day package delivery industry is highly consolidated and
dominated by large, well-recognized companies such as UPS(R) and Federal
Express(R), both of which use technology extensively.
The Company expects that further growth in the same-day time-critical
logistics market will be fueled by corporate America's trend toward outsourcing
and third-party logistics. Many businesses that outsource their distribution
and logistics needs prefer to purchase such services from one source, capable
of servicing multiple cities nationwide. Outsourcing decreases their number of
vendors and also maximizes efficiency, improves customer service and simplifies
billing. Customers are also seeking to reduce their cycle times and implement
"supply chain management" and "just-in-time" inventory management practices
designed to reduce inventory carrying costs. The growth of these practices has
increased the demand for more reliable logistics services. The Company believes
that same-day transportation customers increasingly seek greater reliability,
convenience, and speed from a trusted package delivery provider. Customers are
also seeking to streamline their processes, improve their customer-vendor
relationships and increase their productivity. The Company believes it is the
only national same-day transportation and logistics service provider with the
geographic reach and national footprint to meet these evolving needs.
Regulation and Safety
The Company's business and operations are subject to various federal, state,
and local regulations and, in many instances, require permits and licenses from
these authorities. The Company holds nationwide general commodities authority
from the Federal Highway Administration of the U.S. Department of
Transportation to transport certain property as a motor carrier on an
inter-state basis within the contiguous 48 states and, where required, holds
statewide general commodities authority. The Company is also subject to
regulation by the Federal Aviation Administration/Transportation Safety
Administration for cargo shipments intended for transport on commercial
airlines.
In connection with the operation of certain motor vehicles, the handling of
hazardous materials in its delivery operations and other safety matters,
including insurance requirements, the Company is subject to regulation by the
U.S. Department of Transportation and the states. The Company is also subject
to regulation by the Occupational Safety and Health Administration, provincial
occupational health and safety legislation and federal and provincial
employment laws with respect to such matters as hours of work, driver logbooks
and workers' compensation. The Company believes that it is in compliance with
all of these regulations. Failure to comply with the applicable regulations
could result in substantial fines or possible revocations of one or more of the
Company's operating permits.
From time to time, the Company's drivers are involved in accidents. The
Company carries liability insurance with a per claim self-insured retention.
Owner-operators and independent contractors are required to maintain auto
liability insurance at amounts required by the Company. The Company also has
insurance policies covering fidelity liability, which coverage includes all
drivers. The Company reviews prospective drivers to ensure that they have
acceptable driving records, and pass a criminal background and drug test, among
other criteria.
Sales and Marketing
The Company has initiated a comprehensive sales and marketing program that
emphasizes its competitive position as the leading national provider of
same-day transportation services. The Company has also realigned its
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national accounts and logistics team, and restructured its field sales
organization to effectively pursue growth opportunities. Sales efforts are
conducted at both the local and national levels through the Company's extensive
network of local sales representatives. The Company employs 33 marketing and
sales representatives who make regular calls on existing and potential
customers to determine their ongoing delivery and logistics needs. Sales
efforts are coordinated with customer service representatives who regularly
communicate with customers to monitor the quality of services and quickly
respond to customer concerns.
The Company's sales department develops and executes marketing strategies
and programs that are supported by corporate communications and research
services. The corporate communications department also provides ongoing
communication of corporate activities and programs to employees, the press and
the general public. The expansion of the Company's national sales program and
continuing investment in technology to support expanding operations have been
undertaken at a time when large companies are increasing their demand for
delivery providers who offer a range of delivery services at multiple
locations. As of the end of fiscal 2004, approximately 80 percent of the
Company's revenues come from national companies needing multi-location
logistics solutions.
Competition
The Company competes with a number of established, local, same-day couriers
and messenger services. Competition in local markets is intense. Nationally,
the Company competes with other large companies having same-day transportation
operations in multiple markets. Although many of the Company's competitors have
substantial resources and experience in the same-day transportation business,
the Company believes that its national presence, wide array of service
offerings, use of sophisticated technology and branding strategy will allow it
to successfully compete in any market in which it currently operates or may
elect to enter.
There are also a number of national and international carriers who provide
document and package shipment solutions to individuals and business customers.
This market, which is dominated by major carriers such as UPS(R), Federal
Express(R), Airborne(TM), DHL(TM) and the United States Postal Service, is also
extremely competitive. However, these companies engage primarily in the
next-day and second-day ground and air delivery businesses and operate by
imposing strict drop-off deadlines and rigid package dimension and weight
limitations on customers. By comparison, the Company operates in the same-day
transportation business, and handles customized delivery needs on either a
scheduled, distribution or expedited basis. Accordingly, the Company does not
believe that it is in direct competition with these major carriers in same-day
transportation services although there are no assurances that one of these
entities might not enter its market.
Technology
The Company believes the integration of high-tech communications software
within the currently low-tech same-day transportation business can provide a
market differentiation between its services and those of its competitors. The
Company believes customers will be attracted to companies with the ability to
offer greater efficiency, service, and customer supply chain information
through the use of technology. The Company plans to continue to use technology
to manage and coordinate its dispatching, delivery, tracking, warehousing and
logistics, and other back office functions in order to help its customers and
itself operate more efficiently and cost-effectively. To meet the customers'
needs for reliability, efficiency and speed, the Company has implemented and
will continue to implement the following technology initiatives:
. Smart package tracking technology which will provide a single source of
aggregated delivery chain of custody supply chain information to national
customers;
. A customer-oriented web portal for online information access to provide
package tracking, chain-of-custody updates, electronic signature capture,
real-time proof of delivery retrieval and customer order entry
. Route optimization software for large-market delivery efficiency
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Trademarks
The Company has registered Velocity Express(R), Velocity(R), Relentless
Reliability(R) and currently has other applications pending for trademarks and
service marks ("marks") in the United States and internationally.. There can be
no assurance that any of these marks, if registered, will afford the Company
protection against competitors with similar marks that may have a use date
prior to that of the Company's. In addition, no assurance can be given that
others will not infringe upon the Company's marks, or that the Company's marks
will not infringe upon marks and proprietary rights of others. Furthermore,
there can be no assurance that challenges will not be instituted against the
validity or enforceability of any mark claimed by the Company, and if
instituted, that such challenges will not be successful.
Employees
As of July 3, 2004, the Company had approximately 1,721 employees, of whom
approximately 786 primarily were employed in various management, sales, and
other corporate positions and approximately 935 were employed as drivers and
operations personnel. Additionally, the Company had contracts with
approximately 4,000 independent contractor drivers in its delivery operations
in North America. The Company believes that its relations with its employees
are good and the Company is not a party of any collective bargaining agreement.
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ITEM 2. DESCRIPTION OF PROPERTY
As of July 3, 2004 The Company operated from 141 leased facilities in the
United States and two leased facilities in Canada (not including customer-owned
facilities). These facilities are principally used for distribution and
warehousing operations. The table below summarizes the location of our current
leased facilities within the United States:
Number of Number of
Leased Leased
State Facilities State Facilities
----- ---------- ----- ----------
Alabama................... 3 New Jersey.................. 3
Arizona................... 2 New Mexico.................. 1
Arkansas.................. 3 New York.................... 13
California................ 9 North Carolina.............. 9
Colorado.................. 1 North Dakota................ 2
Connecticut............... 2 Oklahoma.................... 4
Florida................... 8 Oregon...................... 1
Georgia................... 3 Pennsylvania................ 6
Idaho..................... 1 South Carolina.............. 2
Illinois.................. 1 South Dakota................ 2
Iowa...................... 8 Tennessee................... 3
Louisiana................. 8 Texas....................... 10
Maryland.................. 1 Utah........................ 1
Massachusetts............. 2 Virginia.................... 8
Michigan.................. 7 Washington.................. 4
Minnesota................. 4 Wisconsin................... 2
Mississippi............... 4 Total facilities in U.S... 141
Nebraska.................. 3
The Company's corporate headquarters is located at One Morningside Drive
North, Bldg. B, Suite 300, Westport, Connecticut 06880. The Company believes
that its properties are well maintained, in good condition and adequate for its
present needs. Furthermore, the Company believes that suitable additional or
replacement space will be available when required.
As of July 3, 2004, the Company leased approximately 735 vehicles of various
types through operating leases, which were operated by drivers employed by the
Company. The Company also engages independent contractors who provide their own
vehicles and are required to carry insurance coverage at levels dictated by the
Company.
Aggregate rental expense, primarily for facilities, was approximately $18.6
million for the year ended July 3, 2004. See Note 10 to the Company's
Consolidated Financial Statements.
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ITEM 3. LEGAL PROCEEDINGS
The Company is a party to litigation and has claims asserted against it
incidental to its business. Most of such claims are routine litigation that
involves workers' compensation claims, claims arising out of vehicle accidents
and other claims arising out of the performance of same-day transportation
services. The Company carries workers compensation insurance and auto liability
coverage for its employees. The Company and its subsidiaries are also named as
defendants in various employment-related lawsuits arising in the ordinary
course of the business of the Company. The Company vigorously defends against
all of the foregoing claims.
The Company has established reserves for litigation, which it believes are
adequate. The Company reviews its litigation matters on a regular basis to
evaluate the demands and likelihood of settlements and litigation related
expenses. Based on this review, the Company does not believe that the pending
active lawsuits, if resolved or settled unfavorably to the Company, would have
a material adverse effect upon the Company's balance sheet or results of
operations. The Company has managed to fund settlements and litigation expenses
through cash flow and believes that it will be able to do so going forward.
Settlements and litigation expenses have not had a material impact on cash flow
and the Company believes they will not have a material impact going forward.
Cautionary Statements Regarding Pending Litigation and Claims
The Company's statements above concerning pending litigation constitute
forward-looking statements. Investors should consider that there are many
important factors that could adversely affect the Company's assumptions and the
outcome of claims, and cause actual results to differ materially from those
projected in the forward-looking statements. These factors include:
. The Company has made estimates of its exposure in connection with the
lawsuits and claims that have been made. As a result of litigation or
settlement of cases, the actual amount of exposure in a given case could
differ materially from that projected. In addition, in some instances,
the Company's liability for claims may increase or decrease depending
upon the ultimate development of those claims.
. In estimating the Company's exposure to claims, the Company is relying
upon its assessment of insurance coverages and the availability of
insurance. In some instances insurers could contest their obligation to
indemnify the Company for certain claims, based upon insurance policy
exclusions or limitations. In addition, from time to time, in connection
with routine litigation incidental to the Company's business, plaintiffs
may bring claims against the Company that may include undetermined
amounts of punitive damages. The Company is currently not aware of any
such punitive damages claim or claims in the aggregate which would exceed
10% of its current assets. Such punitive damages are not normally covered
by insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders during the fourth quarter of
fiscal 2004.
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PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock currently trades under the symbol "VEXPE" on the
NASDAQ Small Cap Market. The following table sets forth the quarterly high and
low closing prices for the Company's Common Stock, as reported by NASDAQ for
each full quarterly period within the two most recent fiscal years. These
prices represent inter-dealer prices without adjustment for mark-up, mark-down
or commission and do not necessarily reflect actual transactions.
Period High Low
------ ----- -----
Fiscal 2004:
First Quarter.............. $0.90 $0.61
Second Quarter............. 0.83 0.57
Third Quarter.............. 1.02 0.51
Fourth Quarter............. 0.70 0.29
Fiscal 2003:
First Quarter.............. $3.20 $1.87
Second Quarter............. 1.94 0.64
Third Quarter.............. 0.94 0.64
Fourth Quarter............. 0.98 0.61
The closing price of the Company's stock on December 10, 2004 was $0.22.
On December 10, 2004, the number of registered holders of record of Common
Stock was 397. Approximately 2,600 shareholders hold common stock in street
name.
The transfer agent for the Company's Common Stock is American Stock Transfer
& Trust, 59 Maiden Lane, New York, New York.
The Company has not paid any cash dividends on its Common Stock and expects
that for the foreseeable future it will follow a policy of retaining earnings,
if any, in order to finance the continued operations of its business. Payment
of dividends is within the discretion of the Company's Board of Directors and
will depend upon the earnings, capital requirements and operating and financial
condition of the Company, among other factors. Further, the Company's ability
to pay dividends is restricted under the terms of the revolving credit facility
and subordinated debt facility.
Equity Compensation Plan Information
The Company maintains the 1995 Stock Option Plan (the "1995 Plan"), the 2000
Stock Option Plan (the "2000 Plan") and the 1996 Director Stock Option Plan
(the "1996 Director Plan"), pursuant to which it may grant equity awards to
eligible persons. The shareholders of the Company have approved the 1995 Plan,
the 2000 Plan and the 1996 Director Plan.
The following table sets for information about the Company's equity
compensation plans as of July 3, 2004. For more information about the Company's
stock option plans, see Note 8 to the Consolidated Financial Statements.
Number of securities to be
issued upon exercise of Weighted average exercise Number of securities
outstanding options, price of outstanding remaining available
warrants and rights options, warrants and rights for future issuance
-------------------------- ---------------------------- --------------------
Equity compensation plans approved by
security holders.................... 7,455,952(1) $1.88 1,497,252(2)
Equity compensation plans not approved
by security holders(3).............. 4,457,947 1.28 NA
---------- ----- ---------
Total................................. 11,913,899 $1.66 1,497,252
========== ===== =========
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- --------
(1) 175,402 to be issued under the 1995 Plan; 788,611 to be issued under the
2000 Plan; and 9,000 to be issued under the 1996 Director Plan.
(2) 68,004 remaining under the 1995 Plan; 1,321,248 remaining under the 2000
Plan; and 108,000 remaining under the 1996 Director Plan.
(3) Includes (i) 95,000 non qualified stock options that were issued in October
and November 2000 to certain executive officers in connection with their
offers of employment with the Company and vest ratably over three years;
(ii) 20,000 non-qualified stock options issued in October 2001 to certain
executive officers and vest ratably over two years on each six-month
anniversary of the date of grant; (iii) 15,000 non qualified stock options
issued to a consultant in exchange for services provided in 1999 which
option vested on the date of grant; (iv) 4,327,947 shares of common stock
issuable upon exercise of warrants. The warrants were granted to employees
and outside contractors for the purpose of compensation and bonuses and
have various grant dates, expiration dates and exercise prices. Certain of
the warrants contain a provision to allow additional shares of common stock
upon exercise of the warrants in the event that the Company issues other
equity instruments that would result in dilution to the holders of the
warrants.
Recent Sales of Unregistered Securities
The following describes sales of the Company's securities in the last fiscal
quarter without registration under the Securities Act of 1933 (the "Securities
Act"):
In February 2004, the Company's Board of Directors authorized the sale of up
to $12.0 million of Series J Convertible Preferred Stock ("Series J Preferred")
through a private placement. In the March and April 2004, the Company sold
3,088,126 shares of Series J Preferred to investors for net proceeds of
approximately $4.6 million. The issuance of the Series J Preferred is subject
to shareholder approval and is non-voting unless it is converted into common
stock. Additionally, shareholder approval is required to increase the number of
authorized shares of the Company's stock by an amount sufficient to provide for
the issuance of all the preferred shares. TH Lee Putnam Ventures and MCG
Global, who control a majority of the shares have agreed to vote for such
approvals. The initial conversion price of the Series J Preferred is $0.15 per
common share, and is convertible, upon shareholder approval of the issuance of
the Series J Preferred, into the Company's common stock. Both the conversion
price and the number of common shares into which the Series J Preferred is
convertible are subject to adjustment in order to prevent dilution. In the
event the Company issues or sells any shares of Common Stock or securities
convertible into or exercisable for Common Stock for a consideration per share
of Common Stock received or receivable upon conversion or exercise of such
securities, of less than the market price of the Common Stock, determined as of
the date of the initial issue or sale, the conversion rate of the Series J
Preferred shall be proportionately adjusted to prevent dilution. The Series J
Preferred was deemed to have contained a beneficial conversion amounting to
$4.6 million which was recognized as a deemed dividend to preferred
shareholders. The Company began selling its Series J Preferred on March 30,
2004 and has completed the sale of the Series J Preferred on July 26, 2004.
Upon completion of the sale of the Series J Preferred, the Company will be
required to recognize a charge against net income (loss) available to common
shareholders of approximately $7.4 million to reflect the beneficial conversion
in the Series J Preferred.
On June 30, 2004, the Company's Board of Directors authorized the sale of up
to $25 million of Series K Convertible Preferred Stock ("Series K Preferred")
through a private placement. Pursuant to a Stock Purchase Agreement entered
into on August 23, 2004, the Company sold, pending shareholder approval,
7,266,666 shares of Series K Preferred to investors for $1.50 per share and
received net proceeds of approximately $10.9 million. The issuance of the
Series K Preferred is subject to shareholder approval and is non-voting unless
it is converted into common stock. Additionally, shareholder approval is
required to increase the number of authorized shares of the Company's common
stock by an amount sufficient to provide for the issuance of all the preferred
shares. TH Lee Putnam Ventures and MCG Global, who control a majority of the
shares have agreed to vote for such approvals. The initial conversion price of
the Series K Preferred is $0.15 per common share, and, at the time the stock
purchase agreements were executed, assuming that the Series K Preferred were
issued and convertible then, each share of Series K Preferred was convertible
into ten shares of the Company's common stock. Both the conversion price and
the number of common shares into which the Series K Preferred is convertible
are subject
9
to adjustment in order to prevent dilution. The Series K Preferred was deemed
to have contained a beneficial conversion amounting to $10.9 million which was
recognized as a deemed dividend to preferred shareholders. The Company began
selling its Series K Preferred on August 23, 2004 and has not completed the
sale of the total authorized Series K Preferred. Upon completion of the sale of
the Series K Preferred, the Company may again be required to recognize a charge
against net income (loss) available to common shareholders to reflect the
beneficial conversion.
The Company did not use an underwriter or placement agent in connection with
selling the Series' J and K Preferred, and no underwriting commissions were
paid. No means of general solicitation was used in offering the securities. The
securities were sold to a limited group of accredited investors within the
meaning of Rule 501(a) of Regulation D under the Securities Act of 1933 (the
"Securities Act") in a private placement transactions, exempt from registration
under Section 4(2) of the Securities Act and Rule 506 of Regulation D
thereunder.
On December 21, 2004, the Company signed a purchase agreement to raise
approximately $21 million of new equity capital investment. The investment is
initially in the form of a convertible note that will automatically convert
into Series M Convertible Preferred Stock upon approval of the transaction by
the Company's shareholders. The proceeds will be used for general working
capital needs consistent with financial budgets approved from time to time by
the Company's Board of Directors. The Preferred Series M Stock will accrue
cumulative PIK dividends equal to 6% per annum. In the event the Company's
shareholders do not approve the transaction, the interest rate will increase to
19%. As part of the transaction, the investors required that the Company's
charter be amended in a number or respects, including a requirement that, upon
shareholder approval for the transaction, all preferred shareholders
automatically convert their shares of preferred stock to common stock. In the
event of any liquidation or winding up of the Company, the holders of the
Preferred Series M will be entitled to a preference on liquidation equal to one
times (1x) the original purchase price of the Preferred Series M Stock plus
accrued and unpaid dividends. A consolidation or merger of the Company or a
sale of substantially all of its assets shall be treated as a liquidation for
these purposes.
The investment will provide the Company with sufficient working capital
resources to provide for the anticipated liquidity needs for the fiscal year,
and to position the Company to accept definitive and available business with
existing and new customers by settling their respective concerns about the
Company's ability to service their respective business needs on a continuing
basis.
As part of the above-described Series M private placement, the new investors
required that TH Lee Putnam Ventures ("THLPV") reach an agreement to extend,
for a two-year period, the July 1, 2004 capital contribution agreement
previously entered into between THLPV and the lenders. Under the terms of the
capital contribution agreement, in the event that THLPV elects to not provide
further financial support for the Company, THLPV is required to notify the
Company's lenders of such decision and provide specific levels of financial
support for a thirty (30) day period following the notification. In exchange
for entering into the capital contribution agreement, the lenders agreed to
waive certain financial covenants under the Company's credit facilities. At the
time, THLPV did not receive any compensation in exchange for entering into the
capital contribution agreement. As part of the extension of the capital
contribution agreement the Company agreed to issue to THLPV, subject to
shareholder approval, a warrant to purchase shares of common stock equal to 1%
of the fully diluted common stock of the Company on a fully converted basis.
The term of the warrant will be five years and will have an exercise price of
$0.0001. Due to the pricing of the warrant, the Company expects to take a
charge.
The new investors, in the Company's Preferred Series M, include: Special
Situations Fund III, LP and affiliated entities Scorpion Capital Partners, LP,
Pequot Capital; TH Lee Putnam Ventures and affiliated entities Jack Duffy,
William Kingston, Adolf DiBiasio, Vincent Wasik, and MCG Global, LLC.
On December 20, 2004, the Company's Board of Directors authorized the sale
of up to $7.0 million of Series L Convertible Preferred Stock ("Series L
Preferred") through a private placement. The purchaser will be TH Lee Putnam
Ventures and its related affiliates. The Company entered into a Stock Purchase
Agreement on
10
December 21, 2004, pursuant to which the Company will sell, pending shareholder
approval, 7,000,000 shares of Series L Preferred to investors for $1.00 per
share for net proceeds of approximately $7.0 million. The consideration for the
Series L will consist of cancellation of the Company's obligation to repay the
investor the funds paid by the investor to the Company's senior lender to
support the Company's revolving credit facility. The issuance of the Series L
Preferred is subject to shareholder approval and is non-voting unless it is
converted into common stock. Additionally, shareholder approval is required to
increase the number of authorized shares of the Company's common stock by an
amount sufficient to provide for the issuance of all the preferred shares. TH
Lee Putnam Ventures and MCG Global, who control a majority of the shares have
agreed to vote for such approvals. The conversion price of the Series L
Preferred is $0.10 per common share, and, at the time the stock purchase
agreements are executed, assuming that the Series L Preferred were issued and
convertible then, each share of Series L Preferred will be convertible into ten
shares of the Company's common stock. Based on the pricing of the Series L
Preferred, the sale of Series L Preferred is expected to contain a beneficial
conversion amounting to $7.0 million which will be recognized as a deemed
dividend to preferred shareholders at the time of the sale and a charge against
net income (loss) available to common shareholders.
11
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data for fiscal years 2004, 2003,
2002, 2001 and 2000:
Year Ended
------------------------------------------------
July 3, June 28, June 29, June 30, July 1,
2004 2003 2002 2001 2000(1)
-------- -------- -------- -------- --------
(In thousands, except per share data)
Selected Statements of Operations Data:
Revenue..................................... $287,918 $307,138 $342,727 $471,682 $471,152
Cost of services............................ 238,320 241,136 264,766 377,498 364,881
-------- -------- -------- -------- --------
Gross profit................................ 49,598 66,002 77,961 94,184 106,271
Operating expenses.......................... 93,940 74,989 76,040 116,425 129,584
Restructuring charge........................ -- -- -- 7,060 --
-------- -------- -------- -------- --------
Operating income (loss)..................... (44,342) (8,987) 1,921 (29,301) (23,313)
Net interest (expense) income............... (3,385) (2,971) (12,577) (6,334) (5,272)
Common stock warrant charge................. -- -- (1,048) -- --
Other (expense) income...................... (109) (301) 1,225 364 373
-------- -------- -------- -------- --------
Net loss.................................... $(47,836) $(12,259) $(10,479) $(35,271) $(28,212)
======== ======== ======== ======== ========
Net loss applicable to common shareholders.. $(77,683) $(15,609) $(20,357) $(35,022) $(31,720)
======== ======== ======== ======== ========
Basic and diluted loss per common share..... $ (11.04) $ (3.39) $ (5.82) $ (10.51) $ (11.37)
======== ======== ======== ======== ========
Basic and diluted weighted average number of
common shares outstanding................. 7,038 4,606 3,500 3,333 2,790
As of
------------------------------------------------
July 3, June 28, June 29, June 30, July 1,
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
Balance Sheet Data
Working capital (deficit)................... $(35,543) $(20,419) $ 21,155 $ (2,809) $(18,607)
Total assets................................ 93,676 106,489 113,889 158,375 181,723
Long-term debt and capital leases........... 5,235 4,602 38,756 61,242 39,495
Redeemable preferred stock.................. -- -- -- 35,421 25,261
Shareholders' equity (deficit).............. 6,476 22,450 29,315 (31,592) (1,123)
- --------
(1) During the first quarter of fiscal 2000, the Company acquired all the
common stock of Velocity Express, Inc., formerly known as Corporate Express
Delivery Systems, Inc. The results of operations of Velocity are included
from the date of acquisition.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations and other parts of this Annual Report on Form 10-K contain
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements and such differences may be material.
Sales consist primarily of charges to customers for delivery services and
weekly or monthly charges for recurring services, such as facilities
management. Sales are recognized when the service is performed. The Revenue and
Profit for a particular service is dependent upon a number of factors including
size and weight of articles transported, distance transported, special handling
requirements, requested delivery time and local market conditions. Generally,
articles of greater weight transported over longer distances and those that
require special handling produce higher revenue and associated profits.
Cost of sales consists of costs relating directly to performance of
services, including driver and messenger costs, third party delivery charges,
insurance and workers' compensation costs. Substantially all of the drivers
used by the Company provide their own vehicles, and approximately 81% of these
owner-operators are independent contractors as opposed to employees of the
Company. Drivers and messengers are generally compensated based on a percentage
of the delivery charge. Consequently, the Company's driver and messenger costs
are variable in nature. To the extent that the drivers and messengers are
employees of the Company, employee benefit costs related to them, such as
payroll taxes and insurance, are also included in cost of sales.
Selling, general and administrative expenses ("SG&A") include salaries,
wages and benefit costs incurred at the branch level related to taking orders
and dispatching drivers and messengers, as well as administrative costs related
to such functions. Also included in SG&A expenses are regional and corporate
level marketing and administrative costs and occupancy costs related to branch
and corporate locations.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of financial condition and results of
operations are based upon the Company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure
of contingent assets and liabilities. On an on-going basis, the Company
evaluates its estimates, including those related to bad debts, goodwill and
intangible assets, insurance reserves, income taxes, and contingencies and
litigation. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions.
The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements.
. Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for estimated
losses resulting from the inability of its customers to make payments
when due or within a reasonable period of time thereafter. Estimates are
used in determining this allowance based on the Company's historical
collection experience, current trends, credit policy and a percentage of
accounts receivable by aging category. If the financial condition of the
Company's customers were to deteriorate resulting in an impairment of
their ability to make required payments, additional allowances or
write-off may be required. In fiscal 2003, the Company hired an outside
collection agency that assisted in a detailed review of the Company's
accounts receivable. As a result of the review, the Company noticed
deterioration in various customer receivable accounts and wrote off
approximately $4.0 million of customer receivables. In fiscal, 2004 the
Company increased the valuation allowance by a net $2.4 million.
13
. Goodwill and Intangible Impairment
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets, in June 2001. Effective with fiscal 2002 as a result
of adopting this new standard, the Company no longer amortizes goodwill.
Rather, goodwill is subjected to impairment testing, which requires that
the Company estimate the fair value of its goodwill and compare that
estimate to the amount of goodwill recorded on the balance sheet. The
estimation of fair value requires making judgments concerning future
cash flows and appropriate discount rates. These cash flow estimates
take into account current customer volumes and the expectation of new or
renewed contracts, historic gross margins, historic working capital
parameters and planned capital expenditures. The estimate of the fair
value of goodwill could change over time based on a variety of factors,
including the actual operating performance of the Company. If these
estimates or their related assumptions change in the future, the Company
may be required to record impairment charges for these assets.
In order to determine the fair value of Velocity Express the Company
employed three approaches, as follows:
. Implied Enterprise Value based upon publicly trade stock prices;
. Analysis of Fair Value based upon most recent corporate
transactions; and
. Analysis of Fair Value based upon Discounted Cash Flow.
Each of the approaches indicated above yield a range of values and is
widely accepted in determining Fair Value for an enterprise. In each
instance, the values indicated were in excess of the carrying amount of
Goodwill, and therefore no adjustment for impairment was required in
fiscal 2004.
. Insurance Reserves
The Company maintains an insurance program with insurance policies that
have various deductible levels. The Company reserves the estimated
amounts of uninsured claims and deductibles related to such insurance
retentions for claims that have occurred in the normal course of
business. These reserves are established by management based upon the
recommendations of third-party administrators who perform a specific
review of open claims, with consideration of incurred but not reported
claims, as of the balance sheet date. Actual claim settlements may
differ materially from these estimated reserve amounts.
. Income Taxes
In determining the carrying value of the Company's net deferred tax
assets, the Company must assess the likelihood of sufficient future
taxable income in certain tax jurisdictions, based on estimates and
assumptions in order to realize the benefit of these assets. Management
evaluates whether the deferred tax assets may be realized and assesses
the need for additional valuation allowances or reduction of existing
allowances. Consistent with prior years, the Company has assessed a
valuation allowance against its entire deferred tax asset as of July 3,
2004.
. Contingencies
As discussed in Note 10 to the consolidated financial statements, the
Company is involved in various legal proceedings and contingencies and
has recorded liabilities for these matters in accordance with SFAS No.
5, Accounting for Contingencies. SFAS No. 5 requires a liability to be
recorded based on the Company's estimate of the probable cost of the
resolution of a contingency. The actual resolution of these
contingencies may differ from our estimates. If a contingency were
settled for an amount greater than the estimate, a future charge to
income would result. Likewise, if a contingency were settled for an
amount that is less than the estimate, a future credit to income would
result.
14
Overview
The Company is engaged in the business of providing same-day time-critical
logistics solutions to individual consumers and businesses, primarily in the
United States with limited operations in Canada.
The Company has one of the largest nationwide networks of time-critical
logistics solutions in the United States and is a leading provider of
scheduled, distribution and expedited logistics services. The Company's service
offerings are divided into the following categories:
. Scheduled logistics consisting of the daily pickup and delivery of
parcels with narrowly defined time schedules predetermined by the
customer, for example, financial institutions that need a wide variety of
services including the pickup and delivery of non-negotiable instruments,
primarily canceled checks and ATM receipts, the delivery of office
supplies, and the transfer of inter-office mail and correspondence.
. Distribution logistics consisting of the receipt of customer bulk
shipments that are divided and sorted at major metropolitan locations and
delivered into multiple routes with defined endpoints and more broadly
defined time schedules. Customers utilizing distribution logistics
normally include pharmaceutical wholesalers, retailers, manufacturers or
other companies who must distribute merchandise every day from a single
point of origin to many locations within a clearly defined geographic
region.
. Expedited logistics consisting of unique and expedited point-to-point
service for customers with extremely time sensitive delivery
requirements. Most expedited logistics services occur within a major
metropolitan area or radius of 40 miles, and the Company usually offers
one-hour, two- to four-hour and over four-hour delivery services
depending on the customer's time requirements. These services are
typically available 24 hours a day, seven days a week. Expedited
logistics services also include critical parts management and delivery
for companies.
The Company's customers represent a variety of industries and utilize the
Company's services across multiple service offerings. Revenue categories and
percentages of total revenue are as follows:
Commercial & office products............ 34.9%
Financial services...................... 31.0%
Healthcare.............................. 20.1%
Transportation & logistics.............. 7.5%
Energy.................................. 4.7%
Technology.............................. 1.7%
With the enactment of the Federal Law known as Check 21, on October 28,
2004, the Company anticipates continued derogation of financial services
revenue as financial institutions will now electronically scan and process
checks, without the required need to move the physical documents to the
clearing institution. More than off-setting this derogation of revenue in the
Financial Services industry, the Company believes it will continue to benefit
from the growth in Healthcare and Healthcare related services industries within
the United States, and be able to effectively leverage their broad coverage
footprint to capitalize on this national growth industry.
During fiscal 2005, the Company plans to continue to invest in automated
technologies that will increase their competitive advantage in the market by
providing more economical delivery routing, enhance and automated package
tracking, and increased productivity from both a frontline delivery and back
office perspective. During fiscal 2004, the Company spent over $3 million, in
the development and implementation of route management software solutions that
are anticipated to have a significant impact on reducing overall delivery cost,
and increasing the Company's ability to better manage their variable operating
cost. These initiatives will be fine tuned over the next 12 to 24 months, and
are anticipated to be applied across all services offering categories, allowing
the Company to become more profitable and price competitive, through optimized
route management and delivery density.
15
Achieving the Company's financial goals involves maximizing the
effectiveness of the variable cost model by replacing Company drivers with
independent drivers, the implementation of customer-driven technology solutions
and continued leverage of the consolidated back office SG&A platform. To date,
the Company has primarily relied upon debt and equity investments to fund these
activities. During fiscal 2005, the Company will continue to seek the required
additional financing from lenders or through the issuance of additional equity;
however, there can be no assurance that this funding can be obtained.
Historical Results of Operations
Year ended July 3, 2004 Compared to Year Ended June 28, 2003
The Company reports its financial results on a 52-53 week fiscal year basis.
Under this basis, the Company's fiscal year ends on the Saturday closest to
June 30/th/. Fiscal 2004 was a 53 week year, 2003 and 2002 each consisted of 52
weeks. In fiscal years consisting of 53 weeks, the final quarter will consist
of 14 weeks. As such, the fiscal 2004 year includes an additional week of
revenues and expenses when compared against the results of fiscal 2003 and
2002, respectively.
Revenue for the year ended July 3, 2004 decreased $19.2 million or 6.3% to
$287.9 million from $307.1 million for the year ended June 28, 2003. The
decrease in revenue for the year ended July 3, 2004 compared to the same period
last year is related to lower volume experienced as a result of customer
attrition, revenue loss associated with pricing pressure, and customer freight
volume fluctuations of approximately $54.3 million. This decline was offset by
revenue growth during the year from new customer contracts and expansion within
existing customers of approximately $35.1 million. A greater focus on selling
to national accounts resulted in an increased proportion of revenues
originating from those accounts. In fiscal 2004, $149.5 million or 51.9% of
total revenues can be attributed to the Company's 50 largest accounts; versus
$129.1 million or 42.0% during fiscal 2003.
The Company is continually engaged in bidding additional contract work for a
variety of customers. The Company's current pipeline of bidding activity
remains robust, with potential customers whose expected billings would amount
to approximately $92 million on an annual basis. The activity is consistent
across all geographic regions in which the Company operates. Implementation of
newly awarded contracts generally requires from thirty to sixty days for full
implementation.
Cost of services for the year ended July, 2004 was $238.3 million, a
reduction of $2.8 million or 1.2% from $241.1 million for the year ended June
28, 2003. These decreases consist of a $7.5 million volume and restructure
related reductions in employee driver, and employee driver related, cost,
off-set by increases of $4.7 million related to the rising insurance cost.
During 2004, under the employee driver based model, the Company was effected
adversely by fix driver pay commitments during periods where customer attrition
and reductions in sales volume where experienced. As a result, when combined
with the increase in insurance cost, gross margin declined from 21.5% in the
prior-year to 17.2% for the year ended July 3, 2004. During the Second/Third
Quarter of 2004, the Company began the implementation of an independent
contractor driver based model, which it believes will allow for continued
improvement in driver related cost, inclusive of insurance related
expenditures, creating a more variable based cost structure and higher gross
margins. As of July 3, 2004, the Company had reduced the number of employee
based drivers by approximately 10% from the prior fiscal year-end.
Additionally, the Company is now implementing proprietary route management
technology which it feels will allow the Company to improve its gross margin.
The implementation was begin in February 2004 and is targeted to be completed
in all areas within a two year period.
Selling, general and administrative ("SG&A") expenses for the year ended
July, 2004 were $79.9 million or 27.7% of revenue, an increase of $17.9 million
or 28.9% as compared with $62.0 million or 20.2% of revenue for the year ended
June 28, 2003. The increase in SG&A for the year resulted, in part, from $7.7
million of incremental adjustments to the Company's accounts receivable versus
the one year prior period. An additional $2.7 million of SG&A was recorded to
recognize the cost of warrants issued to certain members of management.
16
Further, approximately $2.4 million of the SG&A increase relates to increased
utilization of contract labor. Other items contributing to the increase totaled
$5.1 million, including $1.0 million of deferred financing costs related to
previous financings. Such costs did not have any relationship to the credit
facilities in place at the end of the fiscal year.
Occupancy charges for the year ended July 3, 2004 were $14.0 million, an
increase of $1.0 million or 8.1% from $13.0 million for the year ended June 28,
2003. The net increase is due to higher utility and common area maintenance
charges, higher net rental expense and the expansion of facilities to handle
increased demands associated with new markets, the expansion of the Company's
coverage footprint and location specific growth and volume related requirements.
Interest expense for the year ended July 3, 2004 increased $0.4 million to
$3.4 million from $3.0 million for the year ended June 28, 2003. Interest
expense related to the Company's borrowings increased over the same period in
the prior year as a result of higher average interest rates under the revolving
credit and senior subordinated debt facilities.
As a result of the foregoing factors, the net loss for the year ended July
3, 2004 was $47.8 million, compared with $12.3 million for the same period in
fiscal 2003, a decline of $35.5 million.
Net loss applicable to common shareholders was $77.7 million for year ended
July 3, 2004 as compared with $15.6 million for the same period in fiscal 2003.
For the year, the difference between net loss applicable to common shareholders
and net loss in the current year relates to the beneficial conversion
associated with the sale of the Series I Preferred & Series J Preferred. In the
prior-year, the difference between net loss applicable to common shareholders
and net loss related to the accretion of the charge associated with the common
stock warrants issued with the Series H Preferred.
Year ended June 28, 2003 Compared to Year Ended June 29, 2002
Revenue for the year ended June 28, 2003 decreased $35.6 million or 10.4% to
$307.1 million from $342.7 million for the year ended June 29, 2002. The
decrease in revenue for the year ended June 28, 2003 is related to the
divesture of a non-core air courier business operation of $4.1 million and
lower volume experienced as a result of customer attrition, revenue loss
associated with pricing pressure, and volume declines from the soft economy and
severe weather of approximately $50.3 million. This decline was offset by
revenue growth from new customer contracts during fiscal 2003 of approximately
$18.8 million.
Cost of services for the year ended June 28, 2003 was $241.1 million, a
reduction of $23.7 million or 9.0% from $264.8 million for the year ended June
29, 2002. The reduction of $23.7 million consists of $3.7 million related to
the divestiture of a non-core air courier business operation and $20.0 million
in reduced costs as a result of the reduced revenue described above. In fiscal
2002, the Company's results were impacted favorably by one-time gains achieved
through the initial conversion to the variable cost model. As a result of the
one-time savings achieved in fiscal 2002, gross margin declined from 22.7% in
the prior year to 21.5% for the year ended June 28, 2003. The Company continues
to refine its variable cost strategy, which will allow the Company to continue
to realize savings related to overall driver and vehicle-related costs.
Selling General and Administrative ("SG&A") expenses for the year ended June
28, 2003 were $62.0 million or 20.2% of revenue, a reduction of $1.0 million or
1.6% as compared with $63.0 million or 18.4% of revenue for fiscal 2002. The
decrease in SG&A for fiscal 2003 resulting from integrating, through
technology, all back office processes into one common platform as well as the
Company's continued focus on this integration and scaling back expenses as a
result of the soft economy amounted to $6.3 million. The sale of a non-core air
courier business operation eliminated $0.6 million of related costs. These
reductions were offset by charges associated with the valuation of certain
accounts receivable of $4.0 million and various claims amounting to $1.9
million. In fiscal 2003, the Company hired an outside collection agency that
assisted in a detailed review of the
17
Company's accounts receivable. As a result of the review, the Company noticed
deterioration in its various customer receivable accounts and took a charge of
$4.0 million. Excluding these charges, the operational reduction in SG&A
expenses from fiscal 2002 to fiscal 2003 was actually $6.9 million or 11.0%.
Occupancy charges for fiscal 2003 were $13.0 million, a reduction of $0.1
million or 0.8% from $13.1 million for the year ended June 29, 2002. The
improvement for the year is due to divestitures of a non-core air courier
business operation and better utilization of space in facilities currently
occupied, offset by slightly higher costs in the third and fourth quarters
related to new office startups and higher utility costs related to the cold
weather and higher fuel costs.
Interest expense for the year ended June 28, 2003 decreased $9.6 million to
$3.0 million from $12.6 million for the year ended June 30, 2002. Included in
interest expense for the prior year are certain non-cash charges related to the
conversion of the Series D Bridge Notes and interest thereon amounting to
approximately $4.7 million as well as a non-cash charge of $4.0 million related
to a long-term guarantee the Company received from its largest shareholder on
two letters of credit supporting the Company's revolving credit facility.
Interest expense related to the Company's borrowings decreased over the prior
year primarily as a result of lower interest rates as the Company used LIBOR
contracts for the majority of its borrowings under the revolving credit
facility.
The net loss for the year ended June 28, 2003 was $12.3 million, compared
with $10.5 million for the same period in fiscal 2002, an increase of $1.8
million or 17.1%. Exclusive of the SG&A charges of $5.9 million discussed
above, the net loss for the year ended June 28, 2003 was $6.4 million.
Net loss applicable to common shareholders was $15.6 million for the year
ended June 28, 2003 as compared with $20.4 million for the year ended June 29,
2002. The difference in the current year between net loss applicable to common
shareholders and net loss relates to the beneficial conversion associated with
Series H Preferred and the charge associated with the issuance of warrants to
the holders of Series H Preferred. In the prior year, the difference between
net loss applicable to common shareholders and net loss was comprised of
non-cash charges associated with the Company's redeemable preferred stock.
Liquidity and Capital Resources
Cash flow used in operations was $15.6 million for fiscal 2004. This use of
funds was comprised of cash used in operations of $26.9 million offset by cash
provided as a result of working capital changes of $11.3 million ($7.1 million
of which was provided through an aggressive review of accounts payable terms).
Cash flow used as a result of investing activities was $5.5 million and
consisted primarily of capital expenditures for the Company's continued
development and implementation of cost savings and customer-driven technology
solutions initiatives. The Company's major technological cost savings
initiative entails detailed and interactive analysis and optimization of the
Company's routing designs and metrics. This effort is focused upon optimizing
the efficiency of route definition and benchmarking standards used in delivery
metrics and driver settlements. Two customer-driven technology solutions
initiatives were placed in service during the fiscal year and are comprised of
two elements: (i) a smart package tracking technology which provides a single
source of aggregated delivery information to national customers, and (ii) a
customer-oriented web portal for online information access to provide package
tracking, chain-of-custody updates, electronic signature capture, and real-time
proof of delivery retrieval. The Company expects to reduce its capital
expenditures in fiscal 2005 due to the near completion of portions of the
significant software initiatives described above.
Cash flow from financing activities amounted to $20.7 million during fiscal
2004. The primary uses of cash were for the $9.4 million paydown of the
revolving credit facility and pay down of a $4.0 million note payable. The note
was satisfied as part of a refinancing which provided $6.0 million of cash to
the Company. An additional $26.6 million was provided by the issuance of
preferred stock. Debt financing costs approximated $0.9 million.
18
On June 30, 2004, the Company's Board of Directors authorized the sale of up
to $25 million of Series K Convertible Preferred Stock ("Series K Preferred")
through a private placement. Pursuant to a Stock Purchase Agreement entered
into on August 23, 2004, the Company sold, pending shareholder approval,
7,266,666 shares of Series K Preferred to investors for $1.50 per share and
received net proceeds of approximately $10.9 million. The issuance of the
Series K Preferred is subject to shareholder approval and is non-voting unless
it is converted into common stock. Additionally, shareholder approval is
required to increase the number of authorized shares of the Company's common
stock by an amount sufficient to provide for the issuance of all the preferred
shares. TH Lee Putnam Ventures and MCG Global, who control a majority of the
shares have agreed to vote for such approvals. The initial conversion price of
the Series K Preferred is $0.15 per common share, and, at the time the stock
purchase agreements were executed, assuming that the Series K Preferred were
issued and convertible then, each share of Series K Preferred was convertible
into ten shares of the Company's common stock. Both the conversion price and
the number of common shares into which the Series K Preferred is convertible
are subject to adjustment in order to prevent dilution. This sale of Series K
Preferred was deemed to have contained a beneficial conversion amounting to
$10.9 million which was recognized as a deemed dividend to preferred
shareholders. The Company began selling its Series K Preferred on August 23,
2004 and has not completed the sale of the total authorized Series K Preferred.
Upon the sale of any additional shares of Series K Preferred, the Company may
again be required to recognize a charge against net income (loss) available to
common shareholders to reflect beneficial conversion.
On December 21, 2004, the Company signed a purchase agreement to raise
approximately $21 million of new equity capital investment. The investment is
initially in the form of a convertible note that will automatically convert
into Series M Convertible Preferred Stock upon approval of the transaction by
the Company's shareholders. The proceeds will be used for general working
capital needs consistent with financial budgets approved from time to time by
the Company's Board of Directors. The Preferred Series M Stock will accrue
cumulative PIK dividends equal to 6% per annum. In the event the Company's
shareholders do not approve the transaction, the interest rate will increase to
19%. As part of the transaction, the investors required that the Company's
charter be amended in a number or respects, including a requirement that, upon
shareholder approval for the transaction, all preferred shareholders
automatically convert their shares of preferred stock to common stock. In the
event of any liquidation or winding up of the Company, the holders of the
Preferred Series M will be entitled to a preference on liquidation equal to one
times (1x) the original purchase price of the Preferred Series M Stock plus
accrued and unpaid dividends. A consolidation or merger of the Company or a
sale of substantially all of its assets shall be treated as a liquidation for
these purposes.
The investment will provide the Company with sufficient working capital
resources to provide for the anticipated liquidity needs for the fiscal year,
and to position the Company to accept definitive and available business with
existing and new customers by settling their respective concerns about the
Company's ability to service their respective business needs on a continuing
basis.
As part of the above-described Series M private placement, the new investors
required that TH Lee Putnam Ventures ("THLPV") reach an agreement to extend,
for a two-year period, the July 1, 2004 capital contribution agreement
previously entered into between THLPV and the lenders. Under the terms of the
capital contribution agreement, in the event that THLPV elects to not provide
further financial support for the Company, THLPV is required to notify the
Company's lenders of such decision and provide specific levels of financial
support for a thirty (30) day period following the notification. In exchange
for entering into the capital contribution agreement, the lenders agreed to
waive certain financial covenants under the Company's credit facilities. At the
time, THLPV did not receive any compensation in exchange for entering into the
capital contribution agreement. As part of the extension of the capital
contribution agreement the Company agreed to issue to THLPV, subject to
shareholder approval, a warrant to purchase shares of common stock equal to 1%
of the fully diluted common stock of the Company on a fully converted basis.
The term of the warrant will be five years and will have an exercise price of
$0.0001. Due to the pricing of the warrant, the Company expects to take a
charge.
On December 20, 2004, the Company's Board of Directors authorized the sale
of up to $7.0 million of Series L Convertible Preferred Stock ("Series L
Preferred") through a private placement. The purchaser will be
19
TH Lee Putnam Ventures and its related affiliates. The Company entered into a
Stock Purchase Agreement on December 21, 2004, pursuant to which the Company
will sell, pending shareholder approval, 7,000,000 shares of Series L Preferred
to investors for $1.00 per share for net proceeds of approximately $7.0
million. The consideration for the Series L will consist of cancellation of the
Company's obligation to repay the investor the funds paid by the investor to
the Company's senior lender to support the Company's revolving credit facility.
The issuance of the Series L Preferred is subject to shareholder approval and
is non-voting unless it is converted into common stock. Additionally,
shareholder approval is required to increase the number of authorized shares of
the Company's common stock by an amount sufficient to provide for the issuance
of all the preferred shares. The conversion price of the Series L Preferred is
$0.10 per common share, and, at the time the stock purchase agreements are
executed, assuming that the Series L Preferred were issued and convertible
then, each share of Series L Preferred will be convertible into ten shares of
the Company's common stock. Based on the pricing of the Series L Preferred, the
sale of Series L Preferred is expected to contain a beneficial conversion
amounting to $7.0 million which will be recognized as a deemed dividend to
preferred shareholders at the time of the sale and a charge against net income
(loss) available to common shareholders.
The Company reported a loss from operations of approximately $44.3 million
for fiscal 2004 and has negative working capital of approximately $35.5 million
at July 3, 2004, which includes the classification of the revolving credit
facility as a current liability, and a reduction in Accounts Receivable
balances. At July 3, 2004, the Company had in place waivers of its financial
debt covenants related to its revolving credit facility and its senior
subordinated debt facility. Pursuant to the Company's receipt of $21.0 million
of investment capital, on December 21, 2004 the Company obtained waivers and
consents from its lenders. The lenders waived all existing defaults and delayed
the start date for the financial covenants for both minimum EBITDA and interest
coverage ratio until the earlier of January 1, 2007 and the date upon which the
(a) Company's EBITDA for each of two consecutive months equals or exceeds the
Company's fixed charges (interest expense and scheduled principal payments due
with respect to Money Borrowed) for the applicable month and (b) Availability
under the credit facility for each day of the immediately preceding thirty days
is greater than or equal to $1,000,000. The accompanying financial statements
have been prepared as if the Company will continue as a going concern.
During fiscal 2003, an increasing portion of the Company's trade accounts
payable became past due. In an effort to restructure its trade debt, the
Company proposed a Trade Creditor Plan (the "Plan") to various trade creditors
with balances outstanding as of August 1, 2003. The Plan included approximately
20 percent of the Company's outstanding accounts payable, and was approved by a
majority of the creditors included in the Plan. It was enacted during the
second fiscal quarter. Approval of the plan offset a portion of the Company's
committed cash flow as it provided a vehicle for certain vendor balances to be
paid over a one to three year period. Vendors under this Plan have been
continuing to supply the Company with services and goods.
During fiscal 2005, the Company intends to aggressively focus its efforts on
positive cash flow and continue improved operating performance. These
activities include, but are not limited to, implementation of the Company's
routing optimization software, maximization of the effectiveness of the
variable cost model, implementation of customer-driven technology solutions,
and improved leveraging of the consolidated back office SG&A platform.
The Company maintains a revolving credit facility with Fleet Capital
Corporation that allows for borrowings up to the lesser of $42.5 million or an
amount based on a defined portion of receivables. Interest is payable monthly
at a rate of prime plus 1.25% (5.5% at July 3, 2004), or, at the Company's
election, at LIBOR plus 3.25%. As of July 3, 2004, the Company has 85% of the
facility usage under LIBOR contracts at an interest rate of 4.5%. In addition,
the Company is required to pay a commitment fee of 0.375% on unused amounts of
the total commitment, as defined in the agreement. The facility terminates on
December 31, 2006. The Company's accounts receivable have been pledged to
secure borrowings under the revolving note. The Company is subject to certain
restrictive covenants, the more significant of which include limitations on
dividends, acquisitions, new indebtedness and changes in capital structure. The
Company is also required to maintain financial covenants related to capital
expenditures and maintaining of minimum availability levels. The Company also
maintains a $6.0 million senior subordinated note with interest payable
quarterly at 15% per annum (to be reduced to 12%
20
upon the occurrence of certain events), with a quarterly principal repayment
schedule commencing January 2005 terminating with a final payment at October
31, 2007.
Substantially all of the Company's assets have been pledged to secure
borrowings under the revolving credit facility and senior subordinated note.
The Company is subject to certain restrictive covenants under the agreements,
the more significant of which include limitations on capital asset
expenditures, dividends, acquisitions, new indebtedness in excess of $0.5
million and changes in capital structure. The Company is also required to
maintain the following financial covenants:
. Capital expenditures may not exceed $2.75 million and $3.0 million,
respectively for the fiscal years ending July 3, 2004 and July 2, 2005.
. EBITDA must exceed $0.75 million, $2.0 million, $2.5 million, and $3.3
million, respectively for the three month period ending January 1, 2005,
the six month period ending April 2, 2005, and the six month period
ending July 2, 2005, and each six month period thereafter.
. Interest Coverage ratios must exceed 1.2 to 1, 1.5 to 1, and 2.2 to 1,
respectively for the three month period ending January 1, 2005; the six
month period ending April 2, 2005; and the nine month period ending July
2, 2005.
At July 3, 2004, the Company had in place waivers of its financial debt
covenants related to its revolving credit facility and its senior subordinated
debt facility. These waivers are in effect through January 1, 2005; and
pursuant to the Company's December 2004 receipt of $21.0 million of investment
capital, the Company has finalized the extensions of the waivers for an
additional two years.
On March 31, 2004 and July 1, 2004, the Company entered into the third and
fourth amendments, respectively, to the amended and restated revolving credit
facility with Fleet. The purpose of these amendments was to reset certain of
the financial covenants provided for in the agreement discussed above.
In connection with amending and restating the revolving credit facility and
obtaining the senior subordinated note, the Company was required to obtain an
additional $25.2 million of investment capital. As part of this equity raise,
the Company borrowed $1.0 million during the first quarter from an individual
investor with an agreement to repay the principal and interest within 90 days.
During the second quarter, the indebtedness to the individual investor plus the
interest thereon as well as $0.1 million of other borrowings were converted to
Series I Convertible Preferred Stock.
The company is continuing to pursue operational efficiencies through
conversion of employee drivers to independent contractors, will reduce its back
office workforce, and is pursuing savings in other areas. Through these
actions, the company expects operations to be cash flow positive in the second
half of fiscal 2005.
The Company reviews the adequacy of its provision for bad debts on a regular
basis, taking into consideration customer payment trends, accounts receivable
balances that have been outstanding greater than 90 days, customer payment
trends in the transportation sector, and the strength of the overall economy.
At the end of the fiscal year the reserve for bad debts approximated $4.7
million.
Contractual Obligations and Available Commercial Commitments
As of July 3, 2004, the Company had no outstanding purchase commitments for
capital improvements. The following table presents information regarding
contractual obligations by fiscal year (amounts in thousands):
Payment due by period
------------------------------------------
Less Than 1-2 3-5 More than
Contractual Obligations Total 1 Year years years 5 years
----------------------- ------- --------- ------- ------ ---------
Operating leases.... $21,737 $ 9,108 $10,363 $2,266 $--
Debt................ $ 8,268 $ 2,308 $ 5,467 $ 493 $--
------- ------- ------- ------ ---
Total............... $30,005 $11,416 $15,830 $2,759 $--
======= ======= ======= ====== ===
21
The following table presents information regarding available commercial
commitments and their expiration dates by fiscal year (amounts in thousands):
Expiration by period
---------------------------------------
Less Than 1-2 3-5 More than
Commitment Expiration Total 1 Year years years 5 years
--------------------- ------- --------- ----- ----- ---------
Line of Credit.... $29,531 $29,531 $-- $-- $--
------- ------- --- --- ---
Total............. $29,531 $29,531 $-- $-- $--
======= ======= === === ===
- --------
Note: for more information regarding operating leases, long-term debt and the
line of credit, refer to Notes 10 and 7, respectively.
Off-Balance Sheet Arrangements
As of the date of this Annual Report, the Company does not have any
off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on the Company's financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors. The
term "off-balance sheet arrangement" generally means any transaction, agreement
or other contractual arrangement to which an entity unconsolidated with the
Company is a party, under which the Company has (i) any obligation arising
under a guarantee contract, derivative instrument or variable interest; or (ii)
a retained or contingent interest in assets transferred to such entity or
similar arrangement that serves as credit, liquidity or market risk support for
such assets.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN No. 46), which requires the consolidation of
variable interest entities. FIN No. 46 is applicable to financial statements
issued by the Company beginning in fiscal 2004. However, disclosures are
required if the Company expects to consolidate any variable interest entities.
During May 2004 the Company entered into a business venture designed to
provide both the manpower and the vehicle fleet to service, first--a major
customer and, subsequently--a growing market demand. This major customer's
desire to outsource its delivery operation and related vehicle fleet provided
the genesis for this new business venture, named Peritas. It was formed by MCG
Global, one of the Company's largest investors with a strategic objective to
acquire a fleet of vehicles and to lease such vehicles to Independent
Contractors ("ICs") to service outsourced customer business endeavors. When in
full operation, it is anticipated that the Peritas / Velocity arrangement will
be one where Velocity provides administrative services to Peritas for a fee and
Peritas provides vehicle leases to ICs interested in providing outsource
services to some customers on behalf of Velocity.
Velocity provided for the initial purchase of $799,000 of customer vehicles,
for Peritas, with an offset against account receivable balances due from the
aforementioned customer. Peritas reimbursed Velocity for the full amount of the
purchase price during August 2004. Additional vehicles purchases amounting to
$854,000 have been subsequently made by Velocity on behalf of Peritas and
repaid.
For the fiscal year ended July 3, 2004 the Company has consolidated the
operations of Peritas in accordance with FIN No. 46. Such operations provided a
minimal net income to Velocity of $27,000 on net sales of $36,000.
During the second quarter of fiscal 2004 TH Lee Putnam Ventures, a major
investor in and related party to Velocity purchased 100% of Peritas from MCG
Global.
22
Risk Factors
Customer Contractual Commitments
The Company's contracts with its commercial customers typically have a term
of one to three years, but are terminable upon 30 or 60 days notice. Although
the Company has no reason to believe that these contracts will be terminated
prior to the expiration of their terms, early termination of these contracts
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Highly Competitive Industry
The market for same-day delivery and logistics services has been and is
expected to remain highly competitive. Competition is often intense,
particularly for basic delivery services. High fragmentation and low barriers
to entry characterize the industry. Other companies in the industry compete
with the Company not only for provision of services but also for qualified
drivers. Some of these companies have longer operating histories and greater
financial and other resources than the Company. Additionally, companies that do
not currently operate delivery and logistics businesses may enter the industry
in the future.
Claims Exposure
As of July 3, 2004, the Company utilized the services of approximately 4,000
drivers and messengers. From time to time such persons are involved in
accidents or other activities that may give rise to liability claims. The
Company currently carries liability insurance with a per occurrence and an
aggregate limit of $15 million. Owner-operators are required to maintain
liability insurance of at least the minimum amounts required by applicable
state or provincial law. The Company also has insurance policies covering
property and fiduciary trust liability, which coverage includes all drivers and
messengers. There can be no assurance that claims against the Company, whether
under the liability insurance or the surety bonds, will not exceed the
applicable amount of coverage, that the Company's insurer will be solvent at
the time of settlement of an insured claim, or that the Company will be able to
obtain insurance at acceptable levels and costs in the future. If the Company
were to experience a material increase in the frequency or severity of
accidents, liability claims, workers' compensation claims or unfavorable
resolutions of claims, the Company's business, financial condition and results
of operations could be materially adversely affected. In addition, significant
increases in insurance costs could reduce the Company's profitability.
Certain Tax Matters Related to Drivers
A significant number of the Company's drivers are currently independent
contractors (meaning that they are not its employees). From time to time,
federal and state taxing authorities have sought to assert that independent
contractor drivers in the same-day transportation and transportation industries
are employees. The Company does not pay or withhold federal or state employment
taxes with respect to drivers who are independent contractors. Although the
Company believes that the independent contractors the Company utilizes are not
employees under existing interpretations of federal and state laws, the Company
cannot guarantee that federal and state authorities will not challenge this
position or that other laws or regulations, including tax laws and laws
relating to employment and workers' compensation, will not change. If the IRS
were to successfully assert that the Company's independent contractors are in
fact its employees, the Company would be required to pay withholding taxes,
extend additional employee benefits to these persons and could be required to
pay penalties or be subject to other liabilities as a result of incorrectly
classifying employees. If drivers are deemed to be employees rather than
independent contractors, the Company could be required to increase their
compensation since they may no longer be receiving commission-based
compensation. Any of the foregoing possibilities could increase the Company's
operating costs and have a material adverse effect on its business, financial
condition and results of operations.
23
Local Delivery Industry; General Economic Conditions
The Company's sales and earnings are especially sensitive to events that
affect the delivery services industry including extreme weather conditions,
economic factors affecting the Company's significant customers and shortages of
or disputes with labor, any of which could result in the Company's inability to
service its clients effectively or the inability of the Company to profitably
manage its operations. In addition, downturns in the level of general economic
activity and employment in the U.S. or Canada may negatively impact demand for
the Company's services.
Permits and Licensing
Although certain aspects of the transportation industry have been
significantly deregulated, the Company's delivery operations are still subject
to various federal (U.S. and Canadian), state, provincial and local laws,
ordinances and regulations that in many instances require certificates, permits
and licenses. Failure by the Company to maintain required certificates, permits
or licenses, or to comply with applicable laws, ordinances or regulations could
result in substantial fines or possible revocation of the Company's authority
to conduct certain of its operations.
Dependence on Key Personnel
The Company's success is largely dependent on the skills, experience and
performance of certain key members of its management. The loss of the services
of any of these key employees could have a material adverse effect on the
Company's business, financial condition and results of operations. The
Company's future success and plans for growth also depend on its ability to
attract and retain skilled personnel in all areas of its business. There is
strong competition for skilled personnel in the same-day delivery and logistics
businesses.
Dependence on Availability of Qualified Delivery Personnel
The Company is dependent upon its ability to attract and retain, as
employees or through independent contractor or other arrangements, qualified
delivery personnel who possess the skills and experience necessary to meet the
needs of its operations. The Company competes in markets in which unemployment
is generally relatively low and the competition for owner-operators and other
employees is intense. The Company must continually evaluate and upgrade its
pool of available owner-operators to keep pace with demands for delivery
services. There can be no assurance that qualified delivery personnel will
continue to be available in sufficient numbers and on terms acceptable to the
Company. The inability to attract and retain qualified delivery personnel could
have a material adverse impact on the Company's business, financial condition
and results of operations.
Material Weakness
In connection with the preparation of the Company's consolidated financial
statements for the year ended July 3, 2004 certain significant internal control
deficiencies became evident to management that, in the aggregate, represent
material weaknesses, including, inadequate staffing and supervision leading to
the untimely identification and resolution of certain accounting matters;
failure to perform timely cutoff and reviews, substantiation and evaluation of
certain general ledger account balances; inadequate procurement procedures;
lack of procedures or expertise needed to prepare all required disclosures; and
evidence that employees lack the experience and training to fulfill their
assigned functions. A material weakness is a significant deficiency in one or
more of the internal control components that alone or in the aggregate
precludes the Company's internal controls from reducing to an appropriately low
level the risk that material misstatements in its financial statements will not
be prevented or detected on a timely basis. If the Company is unable to correct
these weaknesses in a timely manner it may represent a risk.
As part of the Company's year-end closing, expenses were identified which
may have a material impact on the reported results of prior fiscal quarters.
Management's attempts to accurately quantify the extent of the
24
required inter-quarter reclassification(s), and then to assess the need to
restate prior quarters' reported results, have been precluded from definitive
completion by the very weaknesses identified herein. As such, attempts to
completely quantify and accurately allocate quarter-specific amounts were not
possible, and therefore all fiscal year-end adjustments were recorded as part
of the Company's fourth quarter results. Corrections of the underlying
weaknesses have been identified, and annual fiscal results are fairly stated.
Volatility of Stock Price
Prices for the Company's common stock will be determined in the marketplace
and may be influenced by many factors, including the depth and liquidity of the
market for the common stock, investor perception of the Company and general
economic and market conditions. Variations in the Company's operating results,
general trends in the industry and other factors could cause the market price
of the common stock to fluctuate significantly. In addition, general trends and
developments in the industry, government regulation and other factors could
have a significant impact on the price of the common stock. The stock market
has, on occasion, experienced extreme price and volume fluctuations that have
often particularly affected market prices for smaller companies and that often
have been unrelated or disproportionate to the operating performance of the
affected companies, and the price of the common stock could be affected by such
fluctuations.
Fuel Costs
The owner-operators utilized by the Company are responsible for all vehicle
expense including maintenance, insurance, fuel and all other operating costs.
The Company makes every reasonable effort to include fuel cost adjustments in
customer billings that are paid to owner-operators to offset the impact of fuel
price increases. If future fuel cost adjustments are insufficient to offset
owner-operators' costs, the Company may be unable to attract a sufficient
number of owner-operators that may negatively impact the Company's business,
financial condition and results of operations.
Capital Funding Requirements
Achieving the Company's financial goals involves maximizing the
effectiveness of the variable cost model, the implementation of customer-driven
technology solutions and continued leverage of the consolidated back office
SG&A platform. To date, the Company has primarily relied upon debt and equity
investments to fund these activities. If its strategy requires additional
funding, the Company will continue to seek the required additional financing
from lenders or through the issuance of additional equity; however, there can
be no assurance that this funding can be obtained.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's operations are not currently subject to material market risks
for interest rates, foreign currency rates, or other market price risks.
However, the Company has revolving debt of $29.5 million at July 3, 2004 that
is subject to variable interest rates. A one percent change in the interest
rate would result in an impact of $295,000 on interest expense.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
CONTENTS PAGE
-------- ----
Report of Independent Auditors.................... 27
Consolidated Financial Statements
Consolidated Balance Sheets.................... 28
Consolidated Statements of Operations.......... 29
Consolidated Statement of Shareholders' Equity. 30
Consolidated Statements of Cash Flows.......... 32
Notes to Consolidated Financial Statements........ 33
26
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Velocity Express Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Velocity
Express Corporation and subsidiaries as of July 3, 2004 and June 28, 2003, and
the related consolidated statements of operations, cash flows and shareholders'
equity for each of the three years in the period ended July 3, 2004. Our audits
also included the financial statement schedule listed in the Index at Item 15.
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with 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 consolidated financial position of
Velocity Express Corporation and subsidiaries at July 3, 2004, and June 28,
2003, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended July 3, 2004 in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Ernst & Young LLP
Stamford, Connecticut
December 10, 2004, except for Note 14
as to which the date is December 21, 2004
27
VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except par value)
July 3, June 28,
2004 2003
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 1,220 $ 1,589
Accounts receivable, net of allowance of $4,743 and $2,300
at July 3, 2004 and June 28, 2003, respectively........................... 27,419 38,102
Accounts receivable--other.................................................. 592 2,681
Prepaid workers' compensation and auto liability insurance.................. 6,289 7,425
Other prepaid expenses...................................................... 2,185 1,114
Other current assets........................................................ 317 404
--------- ---------
Total current assets.................................................... 38,022 51,315
Property and equipment, net.................................................... 11,362 9,810
Goodwill, net of accumulated amortization of $9,410 at each of July 3, 2004 and
June 28, 2003................................................................ 42,830 42,830
Deferred financing costs, net.................................................. 235 1,425
Other assets................................................................... 1,227 1,109
--------- ---------
Total assets................................................................... $ 93,676 $ 106,489
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable...................................................... $ 26,481 $ 19,389
Accrued insurance and claims................................................ 3,697 4,236
Accrued wages and benefits.................................................. 3,738 4,896
Accrued legal and claims.................................................... 2,926 3,730
Other accrued liabilities................................................... 5,715 340
Current portion of long-term debt........................................... 31,008 39,143
--------- ---------
Total current liabilities............................................... 73,565 71,734
Long-term debt................................................................. 5,235 4,602
Accrued insurance and claims................................................... 8,400 7,703
Shareholders' equity:
Preferred stock, $0.004 par value, 53,510 shares authorized
32,919 and 13,615 shares issued and outstanding at
July 3, 2004 and June 28, 2003, respectively.............................. 91,051 64,422
Preferred warrants, 1,042 outstanding at July 3, 2004 and June 28, 2003..... 7,600 7,600
Common stock, $0.004 par value, 150,000 shares authorized
10,415 and 5,388 shares issued and outstanding at
July 3, 2004 and June 28, 2003, respectively.............................. 42 22
Stock subscription receivable............................................... (100) (38)
Additional paid-in-capital.................................................. 101,120 65,882
Accumulated deficit......................................................... (193,058) (115,375)
Foreign currency translation................................................ (179) (63)
--------- ---------
Total shareholders' equity.............................................. 6,476 22,450
--------- ---------
Total liabilities and shareholders' equity.............................. $ 93,676 $ 106,489
========= =========
SEE ACCOMPANYING NOTES
28
VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
July 3, June 28, June 29,
2004 2003 2002
-------- -------- --------
Revenue..................................... $287,918 $307,138 $342,727
Cost of services............................ 238,320 241,136 264,766
-------- -------- --------
Gross profit............................. 49,598 66,002 77,961
Operating expenses:
Occupancy................................ 14,079 13,019 13,071
Selling, general and administrative...... 79,861 61,970 62,969
-------- -------- --------
Total operating expenses.................... 93,940 74,989 76,040
-------- -------- --------
Income (loss) from operations............... (44,342) (8,987) 1,921
Other income (expense):
Interest expense......................... (3,385) (2,971) (12,577)
Common stock warrant charge.............. -- -- (1,048)
Other.................................... (109) (301) 1,225
-------- -------- --------
Net loss.................................... $(47,836) $(12,259) $(10,479)
======== ======== ========
Net loss applicable to common shareholders.. $(77,683) $(15,609) $(20,357)
======== ======== ========
Basic and diluted net loss per common share. $ (11.04) $ (3.39) $ (5.82)
======== ======== ========
Basic and diluted weighted average
number of common shares outstanding....... 7,038 4,606 3,500
======== ======== ========
SEE ACCOMPANYING NOTES.
29
VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
(Amounts in thousands)
Series B Series C Series D Series F
Preferred Preferred Preferred Preferred
Stock Stock Stock Stock
-------------- -------------- -------------- --------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------- ------ ------- ------ ------- ------ -------
Balance at June 30, 2001.......................................... -- $ -- -- $ -- -- $ -- -- $ --
Beneficial conversion of Bridge Notes............................ -- -- -- -- -- -- -- --
Beneficial conversion of Subscription notes...................... -- -- -- -- -- -- -- --
Value of Common Warrants issued in connection with sale of
Series F Preferred.............................................. -- -- -- -- -- -- -- --
Accretion of Series B Redeemable Preferred Stock to its
redemption value................................................ -- -- -- -- -- -- -- --
Accretion of Series D Redeemable Preferred Stock to its
redemption value................................................ -- -- -- -- -- -- -- --
Adjustments to Series C and D warrants to fair value............. -- -- -- -- -- -- -- --
Reclassification of Preferred instruments to Shareholders' Equity
after redemption right waivers.................................. 2,807 24,304 2,000 13,600 1,895 11,327 1,073 11,603
Payments against stock subscription receivable................... -- -- -- -- -- -- -- --
Common Stock warrants issued for services rendered............... -- -- -- -- -- -- -- --
Options issued for services rendered............................. -- -- -- -- -- -- -- --
Stock option exercises........................................... -- -- -- -- -- -- -- --
Warrant exercises................................................ -- -- -- -- -- -- -- --
Issuance of Series G Convertible Preferred Stock................. -- -- -- -- -- -- -- --
Offering costs................................................... -- -- -- -- -- -- -- (144)
Conversion of Series D to Common Stock........................... -- -- -- -- (65) (519) -- --
Conversion of Series F to Common Stock........................... -- -- -- -- -- -- (7) (70)
Net loss......................................................... -- -- -- -- -- -- -- --
Foreign currency translation..................................... -- -- -- -- -- -- -- --
Comprehensive loss............................................... -- -- -- -- -- -- -- --
----- ------- ----- ------- ----- ------- ----- -------
Balance at June 29, 2002.......................................... 2,807 24,304 2,000 13,600 1,830 10,808 1,066 11,389
Payments against stock subscription receivable................... -- -- -- -- -- -- -- --
Stock option expense............................................. -- -- -- -- -- -- -- --
Common Stock warrants issued for services rendered............... -- -- -- -- -- -- -- --
Warrant exercises................................................ -- -- -- -- -- -- -- --
Offering costs................................................... -- -- -- -- -- -- -- --
Issuance of Series H Convertible Preferred Stock................. -- -- -- -- -- -- -- --
Value of Common Warrants issued in connection with sale of
Series H Preferred.............................................. -- -- -- -- -- -- -- --
Beneficial conversion of Series H Preferred Stock................ -- -- -- -- -- -- -- --
Value of Common Warrants issued in connection with sale of
Series H Preferred.............................................. -- -- -- -- -- -- -- --
Conversion of Series D to Common Stock........................... -- -- -- -- (313) (2,500) -- --
Conversion of Series F to Common Stock........................... -- -- -- -- -- -- (140) (1,540)
Net loss......................................................... -- -- -- -- -- -- -- --
Foreign currency translation..................................... -- -- -- -- -- -- -- --
Comprehensive loss............................................... -- -- -- -- -- -- -- --
----- ------- ----- ------- ----- ------- ----- -------
Balance at June 28, 2003.......................................... 2,807 24,304 2,000 13,600 1,517 8,308 926 9,849
Stock option expense............................................. -- -- -- -- -- -- -- --
Issuance of restricted stock..................................... -- -- -- -- -- -- -- --
Common Stock warrants issued for services rendered............... -- -- -- -- -- -- -- --
Warrant exercises................................................ -- -- -- -- -- -- -- --
Offering costs................................................... -- -- -- -- -- -- -- --
Conversion of preferred to common stock.......................... -- -- -- -- -- -- (186) (2,047)
Issuance of Series I Preferred Stock............................. -- -- -- -- -- -- -- --
Conversion of debt and interest to Series I Preferred Stock...... -- -- -- -- -- -- -- --
Series I Preferred Stock issued for services rendered............ -- -- -- -- -- -- -- --
Series I Preferred Stock issued for fees related to senior
subordinated note............................................... -- -- -- -- -- -- -- --
Beneficial conversion of Series I Preferred Stock................ -- -- -- -- -- -- -- --
Issuance of Series J Preferred Stock............................. -- -- -- -- -- -- -- --
Series J Preferred Stock issued for services rendered............ -- -- -- -- -- -- -- --
Beneficial conversion of Series J Preferred Stock................ -- -- -- -- -- -- -- --
Payments against stock subscription receivable................... -- -- -- -- -- -- -- --
Net loss......................................................... -- -- -- -- -- -- -- --
Foreign currency translation..................................... -- -- -- -- -- -- -- --
Comprehensive loss............................................... -- -- -- -- -- -- -- --
----- ------- ----- ------- ----- ------- ----- -------
Balance at July 3, 2004........................................... 2,807 $24,304 2,000 $13,600 1,517 $ 8,308 740 $ 7,802
===== ======= ===== ======= ===== ======= ===== =======
Series G
Preferred
Stock
-------------
Shares Amount
------ ------
Balance at June 30, 2001.......................................... -- $ --
Beneficial conversion of Bridge Notes............................ -- --
Beneficial conversion of Subscription notes...................... -- --
Value of Common Warrants issued in connection with sale of
Series F Preferred.............................................. -- --
Accretion of Series B Redeemable Preferred Stock to its
redemption value................................................ -- --
Accretion of Series D Redeemable Preferred Stock to its
redemption value................................................ -- --
Adjustments to Series C and D warrants to fair value............. -- --
Reclassification of Preferred instruments to Shareholders' Equity
after redemption right waivers.................................. -- --
Payments against stock subscription receivable................... -- --
Common Stock warrants issued for services rendered............... -- --
Options issued for services rendered............................. -- --
Stock option exercises........................................... -- --
Warrant exercises................................................ -- --
Issuance of Series G Convertible Preferred Stock................. 5,865 4,399
Offering costs................................................... -- (20)
Conversion of Series D to Common Stock........................... -- --
Conversion of Series F to Common Stock........................... -- --
Net loss......................................................... -- --
Foreign currency translation..................................... -- --
Comprehensive loss............................................... -- --
----- ------
Balance at June 29, 2002.......................................... 5,865 4,379
Payments against stock subscription receivable................... -- --
Stock option expense............................................. -- --
Common Stock warrants issued for services rendered............... -- --
Warrant exercises................................................ -- --
Offering costs................................................... -- (2)
Issuance of Series H Convertible Preferred Stock................. -- --
Value of Common Warrants issued in connection with sale of
Series H Preferred.............................................. -- --
Beneficial conversion of Series H Preferred Stock................ -- --
Value of Common Warrants issued in connection with sale of
Series H Preferred.............................................. -- --
Conversion of Series D to Common Stock........................... -- --
Conversion of Series F to Common Stock........................... -- --
Net loss......................................................... -- --
Foreign currency translation..................................... -- --
Comprehensive loss............................................... -- --
----- ------
Balance at June 28, 2003.......................................... 5,865 4,377
Stock option expense............................................. -- --
Issuance of restricted stock..................................... -- --
Common Stock warrants issued for services rendered............... -- --
Warrant exercises................................................ -- --
Offering costs................................................... -- --
Conversion of preferred to common stock.......................... (387) (290)
Issuance of Series I Preferred Stock............................. -- --
Conversion of debt and interest to Series I Preferred Stock...... -- --
Series I Preferred Stock issued for services rendered............ -- --
Series I Preferred Stock issued for fees related to senior
subordinated note............................................... -- --
Beneficial conversion of Series I Preferred Stock................ -- --
Issuance of Series J Preferred Stock............................. -- --
Series J Preferred Stock issued for services rendered............ -- --
Beneficial conversion of Series J Preferred Stock................ -- --
Payments against stock subscription receivable................... -- --
Net loss......................................................... -- --
Foreign currency translation..................................... -- --
Comprehensive loss............................................... -- --
----- ------
Balance at July 3, 2004........................................... 5,478 $4,087
===== ======
SEE ACCOMPANYING NOTES.
30
Series H Series I Series J
Preferred Preferred Preferred Preferred Common
Stock Stock Stock Stock Warrants Stock Stock Additional Foreign
- -------------- -------------- ------------- ------------- ------------- Subscription Paid-in Accumulated Currency
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Receivable Capital Deficit Translation
- ------ ------- ------ ------- ------ ------ ------ ------ ------ ------ ------------ ---------- ----------- -----------
-- $ -- -- $ -- -- $ -- -- $ -- 3,429 $14 $ -- $ 47,867 $ (79,409) $ (64)
-- -- -- -- -- -- -- -- -- -- -- 4,120 -- --
-- -- -- -- -- -- -- -- -- -- -- 2,700 (2,700) --
-- -- -- -- -- -- -- -- -- -- -- 258 (258) --
-- -- -- -- -- -- -- -- -- -- -- -- (348) --
-- -- -- -- -- -- -- -- -- -- -- -- (182) --
-- -- -- -- -- -- -- -- -- -- -- -- (6,390) --
-- -- -- -- -- -- 1,042 7,600 -- -- (90) -- -- --
-- -- -- -- -- -- -- -- -- -- 72 -- -- --
-- -- -- -- -- -- -- -- -- -- -- 1,383 -- --
-- -- -- -- -- -- -- -- -- -- -- 28 -- --
-- -- -- -- -- -- -- -- 54 -- -- 200 -- --
-- -- -- -- -- -- -- -- 2 -- -- 8 -- --
-- -- -- -- -- -- -- -- -- -- (8) -- -- --
-- -- -- -- -- -- -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- 153 1 -- 518 -- --
-- -- -- -- -- -- -- -- 25 -- -- 70 -- --
-- -- -- -- -- -- -- -- -- -- -- -- (10,479) --
-- -- -- -- -- -- -- -- -- -- -- -- -- (76)
-- -- -- -- -- -- -- -- -- -- -- -- -- --
---- ------- ------ ------- ----- ------ ----- ------ ------ --- ----- -------- --------- -----
-- -- -- -- -- -- 1,042 7,600 3,663 15 (26) 57,152 (99,766) (140)
-- -- -- -- -- -- -- -- -- -- 18 -- -- --
-- -- -- -- -- -- -- -- -- -- -- 239 -- --
-- -- -- -- -- -- -- -- -- -- -- 78 -- --
-- -- -- -- -- -- -- -- 200 1 -- 399 -- --
-- (386) -- -- -- -- -- -- -- -- -- -- -- --
500 5,000 -- -- -- -- -- -- -- -- (30) -- -- --
-- (1,505) -- -- -- -- -- -- -- -- -- 1,505 -- --
-- 875 -- -- -- -- -- -- -- -- -- -- (875) --
-- -- -- -- -- -- -- -- -- -- -- 2,475 (2,475) --
-- -- -- -- -- -- -- -- 820 4 -- 2,496 -- --
-- -- -- -- -- -- -- -- 705 2 -- 1,538 -- --
-- -- -- -- -- -- -- -- -- -- -- -- (12,259) --
-- -- -- -- -- -- -- -- -- -- -- -- -- 77
-- -- -- -- -- -- -- -- -- -- -- -- -- --
---- ------- ------ ------- ----- ------ ----- ------ ------ --- ----- -------- --------- -----
500 3,984 -- -- -- -- 1,042 7,600 5,388 22 (38) 65,882 (115,375) (63)
-- -- -- -- -- -- -- -- -- -- -- 240 -- --
-- -- -- -- -- -- -- -- 43 -- -- 45 -- --
-- -- -- -- -- -- -- -- -- -- -- 2,566 -- --
-- -- -- -- -- -- -- -- 125 -- -- 1 -- --
-- (1) -- (657) -- (1) -- -- -- -- -- -- -- --
(22) (222) -- -- -- -- -- -- 4,859 20 -- 2,539 -- --
-- -- 15,153 22,730 -- -- -- -- -- -- -- -- -- --
-- -- 901 1,351 -- -- -- -- -- -- -- -- -- --
-- -- 279 419 -- -- -- -- -- -- -- -- -- --
-- -- 477 715 -- -- -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- -- -- -- 25,215 (25,215) --
-- -- -- -- 3,021 4,532 -- -- -- -- (155) -- -- --
-- -- -- -- 67 100 -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- -- -- -- 4,632 (4,632) --
-- -- -- -- -- -- -- -- -- -- 93 -- -- --
-- -- -- -- -- -- -- -- -- -- -- -- (47,836) --
-- -- -- -- -- -- -- -- -- -- -- -- -- (116)
-- -- -- -- -- -- -- -- -- -- -- -- -- --
---- ------- ------ ------- ----- ------ ----- ------ ------ --- ----- -------- --------- -----
478 $ 3,761 16,810 $24,558 3,088 $4,631 1,042 $7,600 10,415 $42 $(100) $101,120 $(193,058) $(179)
==== ======= ====== ======= ===== ====== ===== ====== ====== === ===== ======== ========= =====
Series H
Preferred
Stock
- --------------
Shares Total
- ------ --------
-- $(31,592)
-- 4,120
-- --
-- --
-- (348)
-- (182)
-- (6,390)
-- 68,344
-- 72
-- 1,383
-- 28
-- 200
-- 8
-- 4,391
-- (164)
-- --
-- --
-- (10,479)
-- (76)
--------
-- (10,555)
---- --------
-- 29,315
-- 18
-- 239
-- 78
-- 400
-- (388)
500 4,970
-- --
-- --
-- --
-- --
-- --
-- (12,259)
-- 77
--------
-- (12,182)
---- --------
500 22,450
-- 240
-- 45
-- 2,566
-- 1
-- (659)
(22) --
-- 22,730
-- 1,351
-- 419
-- 715
-- --
-- 4,377
-- 100
-- --
-- 93
-- (47,836)
-- (116)
--------
-- (47,952)
---- --------
478 $ 6,476
==== ========
31
VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year ended
----------------------------
July 3, June 28, June 29,
2004 2003 2002
-------- -------- --------
OPERATING ACTIVITIES
Net loss................................................................................ $(47,836) $(12,259) $(10,479)
Adjustments to reconcile net loss to net cash flows used in operating activities:
Depreciation..................................................................... 3,817 3,608 3,730
Amortization..................................................................... 491 988 921
Equity instruments issued in lieu of payment for services received............... 3,800 78 1,189
Stock option expense............................................................. 240 239 28
Non-cash interest expense........................................................ 128 342 9,057
Other............................................................................ -- 26 69
Gain on sale of assets........................................................... -- -- (1,064)
Gain on retirement of equipment.................................................. -- (11) (80)
Provision for doubtful accounts.................................................. 12,491 6,665 3,165
Change in operating assets and liabilities:
Accounts receivable.............................................................. (1,808) (5,951) 4,088
Other current assets............................................................. 2,546 5,070 (27)
Other assets..................................................................... (118) (146) (298)
Accounts payable................................................................. 7,092 258 (3,872)
Accrued liabilities.............................................................. 3,571 (6,706) (16,273)
-------- -------- --------
Cash used in operating activities............................................. (15,586) (7,799) (9,846)
INVESTING ACTIVITIES
Proceeds from sale of assets........................................................ -- 11 1,198
Purchases of property and equipment................................................. (5,369) (2,474) (4,895)
Other............................................................................... (116) 221 (102)
-------- -------- --------
Cash used in investing activities............................................. (5,485) (2,242) (3,799)
FINANCING ACTIVITIES
Borrowings under revolving credit agreement, net.................................... (9,430) 4,473 1,725
Proceeds from notes payable and long-term debt...................................... 6,619 -- --
Payments on notes payable and long-term debt........................................ (3,959) -- --
Payments on acquisition notes....................................................... -- -- (2,000)
Proceeds from issuance of preferred stock, net...................................... 26,604 4,615 15,236
Proceeds from issuance of common stock, net......................................... -- 400 209
Proceeds from issuance of restricted stock.......................................... 45 -- --
Stock subscription receivable, net activity......................................... (62) -- --
Debt financing costs................................................................ 885 (562) (1,753)
-------- -------- --------
Cash provided by financing activities......................................... 20,702 8,926 13,417
-------- -------- --------
Net decrease in cash and cash equivalents............................................... (369) (1,115) (228)
-------- -------- --------
Cash and cash equivalents, beginning of year............................................ 1,589 2,704 2,932
-------- -------- --------
Cash and cash equivalents, end of year.................................................. $ 1,220 $ 1,589 $ 2,704
======== ======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during period for interest................................................ $ 2,722 $ 2,478 $ 6,519
Noncash Investing and Financing Activities:
Conversion of Series D Preferred to common stock.................................... $ -- $ 2,500 $ 519
Conversion of Series F Preferred to common stock.................................... 2,047 1,540 70
Conversion of Series G Preferred to common stock.................................... 290 -- --
Conversion of Series H Preferred to common stock.................................... 222 -- --
Beneficial conversion of Series I Preferred Stock................................... 25,215 -- --
Beneficial conversion of Series J Preferred Stock................................... 4,632 -- --
Value of Common Warrants issued in connection with sale of Series H Preferred....... -- 3,980 --
Conversion of Bridge Notes to Series D Preferred.................................... -- -- 5,000
Conversion of Subscription Notes to Series D preferred.............................. -- -- 5,000
SEE ACCOMPANYING NOTES.
32
VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
Velocity Express Corporation (formerly known as United Shipping &
Technology, Inc.) and its subsidiaries (collectively, the "Company",
"Velocity") are engaged in the business of providing same-day time-critical
logistics solutions to individual consumers and businesses. The Company
operates primarily in the United States with limited operations in Canada. The
Company currently operates in a single-business segment and thus additional
disclosures under Statement of Financial Accounting Standards ("SFAS") No. 131,
Disclosures About Segments of an Enterprise and Related Information, are not
required.
Reincorporation--On December 18, 2001, United Shipping & Technology, Inc.
reincorporated in Delaware through a merger with and into Velocity Express
Corporation. The merger was effective as of January 4, 2002 at which time
United Shipping & Technology, Inc. ceased to exist as a separate corporate
entity, and all of its assets and liabilities became the assets and liabilities
of Velocity Express Corporation. The name of the Company was changed to
Velocity Express Corporation.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Velocity
Express Corporation and its wholly-owned subsidiaries. All intercompany
balances and transactions have been eliminated in consolidation. The
consolidated financial statements also include Peritas as the result of FASB
Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN No.
46").
Fiscal Year
The Company's fiscal year ends the Saturday closest to June 30/th/. Each
quarter consists of a 13-week period ending on a Saturday. In fiscal years
consisting of 53 weeks, the final quarter will consist of 14 weeks. Fiscal 2004
was a 53 week year, 2003 and 2002 each consisted of 52 weeks.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenue from the same-day transportation and distribution/logistics services
is recognized when services are rendered to customers.
Concentrations of Credit Risk
The Company places its cash with federally insured financial institutions.
At times, such cash balances may be in excess of the federally insured limit.
Concentrations of credit risk with respect to accounts receivable is limited
due to the wide variety of customers to which the Company's services are sold
and the dispersion of those services across many industries and geographic
areas. Further, the Company does not have any one customer that accounts for
10% or more of its revenues. The Company performs credit evaluation procedures
on its customers and generally does not require collateral on its accounts
receivable. An allowance for doubtful accounts is reviewed periodically based
on management's evaluation of collectibility, historical experiences, and other
economic factors.
33
VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Cash Equivalents
All highly liquid investments with maturities of three months or less at the
date of purchase are considered to be cash equivalents and are carried at cost,
which approximates market value.
Property and Equipment
Property and equipment are recorded at cost and are depreciated over their
estimated useful lives using the straight-line method. The estimated useful
lives of buildings and leasehold improvements are 40 years or the life of the
lease and are three to seven years for furniture, equipment, vehicles and
computer software.
Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or
circumstances indicate the carrying amount of an asset may not be recoverable.
The Company evaluates potential impairment by comparing the carrying amount of
the assets with the estimated undiscounted cash flows associated with them. If
an impairment exists, the Company measures the impairment utilizing discounted
cash flows.
Goodwill
The Company accounts for its goodwill in accordance with the provisions of
Financial Accounting Standards Board (FASB) SFAS No. 142, "Goodwill and Other
Intangible Assets." Under these rules, goodwill and other intangible assets
deemed to have indefinite useful lives are no longer amortized but are subject
to impairment tests at least annually, or more frequently if circumstances
occur that indicate impairment may have occurred.
The Company completed its annual goodwill impairment evaluation during 2004,
and concluded that no impairment existed.
Deferred Financing Costs
Deferred financing costs relate to the cost incurred in the arrangement of
the Company's debt agreements and are being amortized using the straight-line
method over the terms of the related debt.
Income Taxes
The Company accounts for income taxes following the provisions of SFAS No.
109, Accounting for Income Taxes. SFAS No. 109 requires that deferred income
taxes be recognized for the future tax consequences associated with differences
between the tax bases of assets and liabilities and their financial reporting
amounts at each year end, based on enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to affect
taxable earnings. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount more likely than not to be realized. The
effect of changes in tax rates is recognized in the period in which the rate
change occurs.
Foreign Currency Translation and Transactions
Foreign assets and liabilities are translated using the year-end exchange
rate. Results of operations are translated using the average exchange rates
throughout the year. Translation gains or losses, net of applicable deferred
taxes, are accumulated as a separate component of shareholders' equity.
34
VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Comprehensive Income (Loss)
The Company follows the provisions of SFAS No. 130, Reporting Comprehensive
Income, which establishes standards for reporting and display of comprehensive
income and its components. Comprehensive income (loss) is net earnings (loss)
plus certain other items that are recorded directly to shareholders' equity.
For the Company, comprehensive income (loss) represents net income (loss)
adjusted for foreign currency translation adjustments. Comprehensive income
(loss) is disclosed in the consolidated statement of shareholders' equity.
Stock Plans and Awards
The Company follows Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, in accounting for its employee stock options.
Pro forma net earnings and earnings per share are presented in Note 8 as if the
Company had adopted SFAS No. 123, Accounting for Stock-Based Compensation, as
amended by SFAS No. 148, Accounting for Stock-Based Compensation--Transition
and Disclosure.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value-based method of accounting
for stock-based employee compensation and to require expanded and more
prominent disclosure about the method of accounting for stock-based employee
compensation and the effect of the method on reported results. The Company has
not adopted a method of transition to the fair value-based method of accounting
for stock-based employee compensation provided under SFAS No. 123 but rather,
follows APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations in accounting for its stock option plans. The following
table illustrates the effect on net loss and loss per share as if the Company
had applied the fair value recognition provisions of SFAS No. 123:
2004 2003 2002
-------- -------- --------
(In thousands, except per share
amounts)
Net loss applicable to common shareholders, as reported................. $(77,683) $(15,609) $(20,357)
Add: Stock-based employee compensation expense included in reported
net loss applicable to common shareholders......................... 127 127 --
Deduct: Stock-based compensation expense determined under fair value
method for all awards.............................................. (391) (1,696) (409)
-------- -------- --------
Pro forma............................................................ $(77,947) $(17,178) $(20,766)
======== ======== ========
Basic and diluted loss per common share:
As reported.......................................................... $ (11.04) $ (3.39) $ (5.82)
======== ======== ========
Pro forma............................................................ $ (11.08) $ (3.73) $ (5.93)
======== ======== ========
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following assumptions for
the fiscal years shown: [No options were granted during fiscal 2004]
2003 2002
---- ----
Expected dividend yield....... 0% 0%
Expected stock volatility..... 118% 115%
Risk-free interest rate....... 2.8% 2.5%
Expected life of options...... 3 3
35
VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options, which have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions. Because the Company's employee stock options
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models may not
necessarily provide a reliable single measure of the fair value of its employee
stock options. Under the forgoing assumptions, the weighted-average fair value
of each option granted during fiscal year 2003 and 2002 was $1.32 and $3.95,
respectively. There were no options granted in fiscal year 2004.
Reclassifications
Certain reclassifications have been made to prior years' consolidated
financial statements to conform to the current year presentation.
New Accounting Pronouncements
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, effective for exit or disposal activities
initiated after December 31, 2002. SFAS No. 146 requires recording costs
associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon management's commitment to an exit plan. The adoption of this
statement beginning in fiscal 2003 has not had a material impact on the
Company's consolidated financial position or results of operations.
The Company adopted FASB Interpretation (FIN) No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, in fiscal 2003. FIN No. 45 provides guidance on the
recognition and disclosure of certain types of guarantees, including product
warranties. The adoption of this standard has not had a material impact on the
Company's consolidated financial statements.
In January 2003, FIN No. 46 was issued, which requires the consolidation of
variable interest entities. FIN No. 46 is applicable to financial statements
issued by the Company beginning in fiscal 2004. However, disclosures are
required if the Company expects to consolidate any variable interest entities.
The Company has consolidated Peritas. [See footnote 5 Consolidated Financial
Interest Entity]
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
changes the accounting for certain financial instruments that, under previous
guidance, issuers could account for as equity. The new statement requires that
those instruments be classified as liabilities in statements of financial
position. Most of the guidance in SFAS No. 150 is effective for all financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the fourth quarter of fiscal year 2003. This
Statement did not have any effect on the Company's consolidated financial
position, results of operations and cash flow.
3. ACQUISITION
On August 2, 2001, the Company completed certain purchase price adjustments
to a fiscal year 2000 merger agreement related to the acquisition of Velocity.
The purchase price adjustments provide for the discharge of certain
pre-acquisition insurance liabilities, principally the amount of the accruals
necessary for workers'
36
VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
compensation and auto insurance reserves of approximately $13.5 million as well
as certain other adjustments including litigation and customer loss accruals,
which had the impact of reducing specific liabilities by approximately $12.0
million. Additionally, under the terms of the settlement regarding the purchase
price, the Company was no longer liable for the convertible subordinated note
to CEX in the amount of $3.6 million, the long-term subordinated note to CEX of
$6.5 million, the short-term subordinated note to CEX of $4.4 million and the
accrued interest related to the notes of approximately $2.8 million. The
purchase price adjustments totaling approximately $42.8 million were recorded
as an offset to the goodwill in the Company's first quarter of fiscal 2002. In
the second quarter of fiscal 2002, the Company finalized all purchase price
adjustments associated with the amendment to the merger agreement resulting in
a reduction in the previously reported adjustment to goodwill of approximately
$3.1 million. In conjunction with the agreement pertaining to the purchase
price adjustments, the Company issued a five-year common stock warrant for
400,000 shares at an exercise price of $2.00 per share. The warrants were
issued for services rendered by two outside consultants, one of whom
subsequently was appointed Chairman of the Board of the Company. The fair value
of the warrants amounted to approximately $1.0 million and is included in other
expense in the statement of operations. The fair value was determined on date
of the grant using the Black-Scholes option pricing model assuming expected
volatility of 121%, a risk-free interest rate of 4%, and an expected life of
five years.
The acquisition has been accounted for using the purchase method of
accounting. Accordingly, the purchase price was allocated to the net assets
acquired based upon their estimated fair values.
4. RESTRUCTURING
In connection with the acquisition of Velocity, management implemented a
plan to involuntarily terminate approximately 100 employees and to consolidate
certain facilities. Approximately $3.9 million in anticipated costs relating to
such items was included in the acquisition cost allocation. As of June 28,
2003, approximately $3.9 million in costs (primarily related to severance
payments and lease terminations) have been charged against the reserve and no
amounts related to such plan have been included in the determination of net
loss for the year.
During fiscal 2004 the Company relocated its headquarters and financial
functions to Westport Connecticut from Minnesota. The costs of relocation,
employee acquisition, training and severance were recognized as period costs.
Approximately $243,000 of severance pay liability remains at July 3, 2004 and
has been accrued.
5. CONSOLIDATED FINANCIAL INTEREST ENTITY
During May 2004 the Company entered into a business venture designed to
provide both the manpower and the vehicle fleet to service, first--a major
customer and, subsequently--a growing market demand. This major customer's
desire to outsource its delivery operation and related vehicle fleet provided
the genesis for this new business venture, named Peritas. It was formed by MCG
Global, one of the Company's largest investors with a strategic objective to
acquire a fleet of vehicles and to lease such vehicles to Independent
Contractors ("ICs") to service outsourced customer business endeavors. When in
full operation, it is anticipated that the Peritas / Velocity arrangement will
be one where Velocity provides administrative services to Peritas for a fee and
Peritas provides vehicle leases to ICs interested in providing outsource
services to some customers on behalf of Velocity.
Velocity provided for the initial purchase of $799,000 of customer vehicles,
for Peritas, with an offset against account receivable balances due from the
aforementioned customer. Peritas reimbursed Velocity for the full amount of the
purchase price during August 2004. Additional vehicles purchases amounting to
$854,000 have been subsequently made by Velocity on behalf of Peritas and
repaid.
37
VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
For the fiscal year ended July 3, 2004 the operations of Peritas have been
consolidated. Such operations provided a minimal net income to Velocity of
$27,000 on net sales of $36,000.
During the second quarter of fiscal 2005 TH Lee Putnam Ventures, a major
investor in and related party to Velocity purchased 100% of Peritas from MCG
Global [See footnote 14 SUBSEQUENT EVENTS].
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
July 3, June 28,
2004 2003
------- --------
(Amounts in thousands)
Land........................................ $ 194 $ 194
Buildings and leasehold improvements........ 1,610 1,395
Furniture, equipment and vehicles........... 6,851 7,636
Computer software........................... 11,941 8,129
------- -------
20,596 17,354
Less accumulated depreciation............... (9,234) (7,544)
------- -------
Total....................................... $11,362 $ 9,810
======= =======
7. DEBT
Long-term debt consists of the following:
July 3, June 28,
2004 2003
-------- --------
(Amounts in thousands)
Revolving note.................. $ 29,531 $ 38,961
Senior subordinated note........ 5,468 4,602
Other........................... 1,244 182
-------- --------
36,243 43,745
Less current maturities......... (31,008) (39,143)
-------- --------
Total Long Term Debt............ $ 5,235 $ 4,602
======== ========
The future maturities of long-term debt consist of the following (amounts in
thousands):
Revolving Senior
Line of Credit Subordinated Note Other Total
-------------- ----------------- ------ -------
Fiscal year:
2005....... $29,531 $1,000 $ 477 $31,008
2006....... -- 2,000 593 2,593
2007....... -- 2,000 174 2,174
Thereafter. -- 468 -- 468
------- ------ ------ -------
$29,531 $5,468 $1,244 $36,243
======= ====== ====== =======
38
VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
On January 25, 2002, the Company entered into a revolving credit facility
with Fleet Capital Corporation ("Fleet"), which replaced the credit facility
with GE Capital. Borrowings under the revolving note were limited to the lesser
of $40 million or an amount based on a defined portion of receivables. Interest
was payable monthly at a rate of prime plus 1.25% (5.25% at June 28, 2003), or,
at the Company's election, at LIBOR plus 3%. Further, the Company had the
ability to lower these margins by 0.5% over the remainder of the agreement
provided it met certain conditions as defined in the agreement. As of June 28,
2003, the Company had 81% of the facility under LIBOR contracts at interest
rates ranging from 4.25% to 4.375%. In addition, the Company was required to
pay a commitment fee of 0.375% on unused amounts of the total commitment, as
defined in the agreement. Commitment fees paid during fiscal 2004 and 2003 were
minimal. The facility was scheduled to mature January 2004, but amended as
discussed below.
On November 26, 2003, the Company amended and restated the revolving credit
facility with Fleet and Merrill Lynch Capital. Borrowings under this new
arrangement are limited to the lesser of $42.5 million or an amount based on a
defined portion of receivables. Interest is payable monthly at a rate of prime
plus 1.25% (5.5% at July 3, 2004), or, at the Company's election, at LIBOR plus
3.25%. Further, these margins may be adjusted upward or downward 25 basis
points on an annual basis depending on the Company's achieving certain
conditions as defined in the agreement. As of July 3, 2004, the Company has 85%
of the facility usage under LIBOR contracts at an average interest rate of
4.5%. In addition, the Company is required to pay a commitment fee of 0.375% on
unused amounts of the total commitment, as defined in the agreement. Commitment
fees paid during fiscal 2004 and 2003 were minimal. The facility terminates on
December 31, 2006. Due to the characteristics of the revolving credit facility,
in accordance with current accounting pronouncements, the Company has
classified the amount outstanding under the revolving credit facility as a
current liability.
In exchange for a long-term guarantee to provide additional collateral
support under the revolving note during the second quarter of fiscal 2002, the
Company agreed to compensate its largest investor by reducing the conversion
prices of the Series B and Series C Preferred. In conjunction with the
conversion price amendment, the Company recognized a $4.0 million charge,
representing the fair value of the benefit received by the investor as a result
of the reduction of the conversion prices, which was recorded as non-cash
interest expense.
During fiscal year 2002 the Company entered into a senior subordinated note
with Bayview Capital which called for interest payable quarterly at 12% per
annum and was due September 30, 2004. The note was subordinate to the revolving
note. The initial carrying value of the senior subordinated note was reduced by
$1.7 million for the fair value of the common stock warrant issued to the
senior subordinated lender. The unamortized discount was $0.4 million at June
28, 2003, was being amortized over the remaining term of the note. As noted
below the note was paid on November 26, 2003. The unamortized balance of the
original issue discount was recognized as a period expense and reported as a
component of interest expense for the year ended July 3, 2004. The related
warrant has an exercise price of $6.71 per share and entitles the holder to
acquire, in whole or in part, 674,540 shares of the Company's common stock, as
adjusted to reflect certain anti-dilution rights as defined in the warrant
purchase agreement.
On November 26, 2003, the Company entered into a new senior subordinated
note agreement with BET Associates, LP which replaced the senior subordinated
debt facility with the former lender, Bayview Capital. The initial carrying
value of the senior subordinated note was $6.0 million and was reduced by $0.6
million for the fair value of Series I Preferred Stock issued to the senior
subordinated lender. The unamortized discount was $0.5 million at July 3, 2004,
and is being amortized over the remaining term of the note. The Company also
incurred fees of $0.2 million, $0.1 million of which were satisfied through the
issuance of Series I Preferred Stock. These
39
VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
fees were recorded as deferred financing costs and will be amortized over the
life of the loan. The senior subordinated note has monthly interest payable 15%
per annum (to be reduced to 12% upon the occurrence of certain events), and
includes a requirement of quarterly principal repayments of $0.5 million
beginning January 31, 2005. Further, the Company is required to pay a service
fee of $5,000 per month related to the acquisition and management of the
indebtedness. The senior subordinated note is due October 31, 2007. The note is
subordinate to the revolving note.
During fiscal years 2004, and 2003 the company amortized $1.2 million and
$1.0 million of deferred financing costs, respectively.
Substantially all of the Company's assets have been pledged to secure
borrowings under the revolving credit facility and senior subordinated note.
The Company is subject to certain restrictive covenants under the agreements,
the more significant of which include limitations on capital asset
expenditures, dividends, acquisitions, new indebtedness in excess of $0.5
million and changes in capital structure. The Company has been required to
maintain the following financial covenants:
. Capital expenditures may not exceed $2.75 million and $3.0 million,
respectively for the fiscal years ending July 3, 2004 and July 2, 2005.
. EBITDA must exceed $0.75 million, $2.0 million, $2.5 million, and $3.3
million, respectively for the three month period ending January 1, 2005,
the six month period ending April 2, 2005, and the six month period
ending July 2, 2005, and each six month period thereafter.
. Interest Coverage ratios must exceed 1.2 to 1, 1.5 to 1, and 2.2 to 1,
respectively for the three month period ending January 1, 2005; the six
month period ending April 2, 2005; and the nine month period ending July
2, 2005.
On March 31, 2004 and July 1, 2004, the Company entered into the third and
fourth amendments, respectively, to the amended and restated revolving credit
facility with Fleet. The purpose of these amendments was to reset certain of
the financial covenants, provided for in the agreement discussed above, that
the Company had at the time violated.
As of July 3, 2004, the Company had in place waivers of its financial debt
covenants related to its revolving credit and its senior subordinated debt
facilities. Pursuant to the Company's receipt of $21.0 million of investment
capital, on December 21, 2004 the Company obtained waivers and consents from
its lenders. The lenders waived all existing defaults and delayed the start
date for the financial covenants for both minimum EBITDA and interest coverage
ratio until the earlier of January 1, 2007 and the date upon which the (a)
Company's EBITDA for each of two consecutive months equals or exceeds the
Company's fixed charges (interest expense and scheduled principal payments due
with respect to Money Borrowed) for the applicable month and (b) Availability
under the credit facility for each day of the immediately preceding thirty days
is greater than or equal to $1,000,000.
In connection with amending and restating the revolving credit facility and
obtaining the senior subordinated note, the Company was required to obtain an
additional $25.2 million of investment capital. As part of this equity raise,
the Company borrowed $1.0 million during the first quarter from an individual
investor with an agreement to repay the principal and interest within 90 days.
During the second quarter, the indebtedness to the individual investor plus the
interest thereon as well as $0.1 million of other borrowings were converted to
Series I Convertible Preferred Stock.
40
VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
8. SHAREHOLDERS' EQUITY
At July 3, 2004, the following shares of the Company's $0.004 par value
stock were authorized, issued and outstanding:
Issued and
Authorized Outstanding at
Shares July 3, 2004
----------- --------------
Series J Convertible Preferred Stock.............. 8,000,000 3,088,126
Series I Convertible Preferred Stock.............. 16,810,000 16,809,987
Series H Convertible Preferred Stock.............. 500,000 477,797
Series G Convertible Preferred Stock.............. 9,000,000 5,478,331
Series F Convertible Preferred Stock.............. 1,200,000 740,339
Series D Convertible Preferred Stock.............. 3,000,000 1,517,444
Series C Convertible Preferred Stock.............. 5,000,000 2,000,000
Series B Convertible Preferred Stock.............. 10,000,000 2,806,797
Common Stock...................................... 150,000,000 10,415,218
Series J Convertible Preferred Stock
In February 2004, the Company's Board of Directors authorized the sale of up
to $12.0 million of Series J Convertible Preferred Stock ("Series J Preferred")
through a private placement. Pursuant to Stock Purchase Agreements entered into
during March and April 2004, the Company contracted to issue, upon shareholder
approval, 3,088,126 shares of Series J Preferred to investors for $1.50 per
share for net proceeds of approximately $4.6 million. The issuance of the
Series J Preferred is subject to shareholder approval and is non-voting unless
it is converted into common stock. TH Lee Putnam Ventures & MCG Global, who
control a majority of the shares, have agreed to vote for such approvals.
Additionally, shareholder approval is required to increase the number of
authorized shares of the Company's stock by an amount sufficient to provide for
the issuance of all the preferred shares. The initial conversion price of the
Series J Preferred is $0.15 per common share, and, at the time the stock
purchase agreements were entered into, assuming that the Series J Preferred
were issued and convertible then, each share of Series J Preferred was
convertible into ten shares of the Company's common stock. Both the conversion
price and the number of common shares into which the Series J Preferred is
convertible are subject to adjustment in order to prevent dilution. The Series
J Preferred was deemed to have contained a beneficial conversion amounting to
$4.6 million which was recognized as a deemed dividend to preferred
shareholders. The Company began selling its Series J Preferred on March 30,
2004 and has completed the sale of the Series J Preferred in the first quarter
of fiscal 2005. Upon completion of the sale of the Series J Preferred, the
Company will be required to recognize a charge against net income (loss)
available to common shareholders of approximately $7.4 million to reflect the
beneficial conversion in the Series J Preferred.
Series I Convertible Preferred Stock
In connection with the extensions of the revolving credit and senior
subordinated debt facilities in November 2003, the Company's Board of Directors
authorized the sale of up to $25.2 million in Series I Convertible Preferred
Stock ("Series I Preferred") through a private placement. Pursuant to Stock
Purchase Agreements entered into during October, November and December 2003,
the Company contracted to issue, upon shareholder approval, 16,809,987 shares
of Series I Convertible Preferred Stock for $1.50 per share for net proceeds of
approximately $24.6 million. The issuance of the Series I Preferred is subject
to shareholder approval and has voting rights on an as-converted basis unless
the resulting conversion results in the holder having, cumulatively, more than
40% of the voting stock of the Company. TH Lee Putnam Ventures & MCG Global,
who control a majority of the shares, have agreed to vote for such approvals.
Additionally, shareholder approval
41
VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
is required to increase the number of authorized shares of the Company's stock
by an amount sufficient to provide for the issuance of all the preferred
shares. The initial conversion price of the Series I Preferred is $0.15 per
common share, and, at the time the stock purchase agreements were entered into,
assuming that the Series I Preferred were issued and convertible then, each
share of Series I Preferred was convertible into ten shares of the Company's
common stock. Both the conversion price and the number of common shares into
which the Series I Preferred is convertible are subject to adjustment in order
to prevent dilution. The Series I Preferred was deemed to have contained a
beneficial conversion amounting to $25.2 million which was recognized as a
deemed dividend to preferred shareholders.
Series H Convertible Preferred Stock
The Company, while in the process of raising subordinated debt, authorized
the issuance of up to $5.0 million of its Series H Convertible Preferred Stock
("Series H Preferred"). The initial conversion price of the Series H Preferred
was $1.00 per common share, and is convertible into the Company's common stock
upon the later of shareholder approval or April 30, 2003. Both the conversion
price and the number of common shares into which the Series H Preferred is
convertible are subject to adjustment in order to prevent dilution.
The Company sold 500,000 shares of Series H Preferred to investors for net
proceeds of approximately $4.6 million. In connection with the sales of Series
H Preferred, the Company issued five-year warrants to purchase 2.5 million
shares of common stock at an exercise price of $0.01 per share. The proceeds
from the Series H Preferred were allocated based upon their relative fair
values between the warrants and the Series H Preferred resulting in an
allocation of $1.5 million from Series H Preferred to additional paid in
capital. The Series H Preferred was deemed to have contained a beneficial
conversion amounting to $0.9 million which was recognized as a deemed dividend
to preferred shareholders.
The Series H Preferred contained a call provision that provided the Company
with the right to repurchase any or all of the shares of Series H Preferred at
a purchase price of $1.00 per share of common stock until the expiration of the
call provision on April 30, 2003. If the Company did not call the Series H
Preferred prior to the call date, the Company would be required to issue a
warrant to purchase additional shares of common stock. The Company did not
exercise its call right with respect to the Series H Preferred prior to its
expiration on April 30, 2003, and on May 1, 2003 issued 3.8 million warrants
with a five-year term and an exercise price of $0.01 per share to the holders
of the Series H Preferred. The fair value of these warrants determined on the
date of grant amounted to approximately $2.5 million and has been accounted for
on the date of their issuance as a deemed dividend to the preferred
shareholders which increased the accumulated deficit and additional paid in
capital.
Series G Convertible Preferred Stock
In May 2002, the Company issued 5,865,331 shares of Series G Preferred for
net proceeds of $4.1 million. The initial conversion price of the Series G
Preferred was $3.75, and, at the time of issuance, each share of Series G
Preferred was convertible, upon shareholder approval, into 0.2 shares of the
Company's common stock. Both the conversion price and the number of common
shares into which the Series G is convertible are subject to adjustment in
order to prevent dilution.
Series F Convertible Preferred Stock
During fiscal 2002, the Company issued 1,072,752 shares of Series F
Preferred for net proceeds of approximately $11.3 million. The initial
conversion price of the Series F Preferred was $2.75, and, at the time of
issuance, each share of Series F Preferred was convertible into four shares of
the Company's common stock. Both the conversion price and the number of common
shares into which the Series F is convertible are subject to adjustment in
order to prevent dilution. The Company also issued warrants to purchase 360,128
shares of
42
VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
common stock with an exercise price of $3.60 per share in connection with these
sales. The warrants expire between July and November of 2006. The fair value of
the warrants as determined by an outside independent appraiser was determined
to be approximately $0.3 million and was charged to accumulated deficit. At
July 3, 2004, 740,339 shares of Series F Preferred are outstanding.
Series D Convertible Preferred Stock
The Company entered into a bridge loan agreement dated January 4, 2001, and
a supplemental bridge loan agreement dated January 31, 2001 (collectively, the
"Bridge Loan Agreement"), pursuant to which the Company received $3.5 million
and $1.5 million, respectively. The indebtedness was represented by promissory
notes, payable on July 4, 2001, bearing interest at a rate of 18% per annum
(the "Bridge Notes"), which were convertible at the option of the lender into
909,090 shares of the Company's Series D Preferred at an exercise price of
$5.50 per share pursuant to the Bridge Loan Agreement, upon shareholder
approval of the conversion.
The Company also entered into note purchase agreements in connection with
the issuance of promissory notes convertible into shares of Series D Preferred
(the "Subscription Notes"). During March and April 2001, the Company sold
Subscription Notes convertible into 624,906 shares of Series D Preferred to
accredited investors for an aggregate $5.0 million. Each Subscription Note was
convertible into shares of Series D Preferred at an effective purchase price of
$8.00 per share of Series D Preferred pursuant to the Subscription Notes.
During fiscal 2002 at a special shareholders' meeting, the Company's
shareholders approved the conversion of the Bridge Notes and the Subscription
Notes that the Company entered into in fiscal 2001 into shares of Series D
Preferred, resulting in the issuance of 1,642,444 shares of Series D Preferred.
As a result of the conversion, the Company recorded a $4.7 million non-cash
interest charge. The initial conversion price of the Series D Preferred was
$4.00, and, at the time of issuance, each share of Series D Preferred was
convertible into two shares of the Company's common stock. Both the conversion
price and the number of common shares into which the Series D is convertible
are subject to adjustment in order to prevent dilution.
The Company's Series D Preferred that resulted from the conversion of the
Subscription Notes was deemed to have contained beneficial conversion features
that were recognized as a deemed dividend to preferred shareholders. The value
of the proceeds allocated to the beneficial conversion feature was $2.7 million
and was recognized as a return to the preferred shareholders at the date of
shareholder approval since the Series D Preferred was immediately convertible.
In connection with the Bridge Loan Agreement, the Company issued warrants to
purchase an aggregate 216,533 shares of Series D Preferred at a purchase price
of $0.01 per share (the "Bridge Warrants"). The warrants expire January 3,
2006. The fair value of the Bridge Warrants as determined by an outside
independent appraiser was approximately $0.9 million and was allocated from the
value received from the Series D Bridge Notes.
In fiscal 2001, the Company entered into securities purchase agreements in
connection with the sale of Series D Preferred. The Company sold 252,429 shares
of Series D Preferred at $8.00 per share for approximately $2.0 million.
Series C Convertible Preferred Stock
In September 2000, the Company issued 2,000,000 shares of its Series C
Convertible Preferred Stock (the "Series C Preferred") at $6.00 per share for
total proceeds of $12.0 million and the cancellation of two warrants issued in
connection with the Series B Preferred. The initial conversion price of the
Series C Preferred was
43
VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
$30.00, and, at the time of issuance, each share of Series C Preferred was
convertible into 0.20 shares of the Company's common stock. Both the conversion
price and the number of common shares into which the Series C is convertible
are subject to adjustment in order to prevent dilution.
In connection with the issuance of the Series C Preferred the Company issued
warrants to purchase 825,484 shares of Series C Preferred at an exercise price
of $0.01 per share (the "Series C Warrants"). The warrants expire September 1,
2005. The fair value of the Series C Warrants as determined by an outside
independent appraiser was determined to be approximately $3.5 million and was
allocated from the value received from the Series C Preferred Stock. The $2.7
million remaining fair value received for the Series C Preferred in excess of
the Series C Preferred redemption value and the Series C Warrants was recorded
as additional paid-in capital.
Series B Convertible Preferred Stock
In May 2000, the Company entered into an agreement to sell 2,806,797 shares
of the Company's Series B Convertible Preferred Stock (the "Series B
Preferred") at a price of $9.00 per share for a total of approximately $25.3
million. Three separate warrants were issued to the Series B Preferred
shareholders subject to approval at a special meeting of shareholders in August
2000. The fair value of the warrants issued with the Series B Preferred was
allocated from the carrying amount of the Series B Preferred to the respective
warrants at the August 2000 measurement date. The initial conversion price of
the Series B Preferred was $45.00, and, at the time of issuance, each share of
Series B Preferred was convertible into 0.20 shares of the Company's common
stock. Both the conversion price and the number of common shares into which the
Series B is convertible are subject to adjustment in order to prevent dilution.
The Company agreed to issue with the preferred shares three warrants upon
the approval of the Company's shareholders. The terms of the three warrants
were as follows:
. A warrant to purchase the number of shares of Series B Preferred equal to
an aggregate of $30 million divided by the 45-day average closing sales
price of the Company's common stock immediately prior to the date of
exercise. The fair value of this warrant as determined by an outside
independent appraiser was determined to be approximately $4.4 million at
the date of shareholder approval. In exchange for the Series C Warrants,
the Company subsequently canceled this warrant.
. A warrant to purchase up to an aggregate of 452,901 shares of Series B
Preferred at an exercise price of $9.00 per share, subject to adjustment
in order to prevent dilution. The fair value of this preferred warrant as
determined by an outside independent appraiser was determined to be
approximately $0.6 million at the date of shareholder approval. In
exchange for the Series C Warrants, the Company subsequently canceled
this warrant.
. A warrant to purchase an aggregate of 85,000 shares of the Company's
common stock. The warrant becomes exercisable on a pro rata basis in the
event and to the extent that any of the 600,000 options granted under the
Company's 2000 Stock Option Plan are exercised. The exercise price is
equal to the lowest exercise price of the initially approved 2000 Plan
options, subject to adjustment to prevent dilution. The fair value of
this warrant as determined by an outside independent appraiser was
determined to be approximately $0.4 million at the date of shareholder
approval. The warrant expired on May 31, 2004.
In September 2000, two of the warrants issued to the Series B Preferred
shareholders were exchanged as partial consideration for the Series C
Preferred. The remaining outstanding warrant issued with the Series B Preferred
provides for the purchase of an aggregate of 85,000 shares of the Company's
common stock. The
44
VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
warrant becomes exercisable on a pro rata basis in the event and to the extent
that any of the 3,000,000 options granted under the Company's 2000 Stock Option
Plan ("2000 Plan") are exercised. The exercise price is equal to the lowest
exercise price of the initially approved 2000 Plan options, subject to
adjustment to prevent dilution. The warrant expired on May 31, 2004.
The Company's Series B Preferred was deemed to have contained beneficial
conversion features that were recognized as a deemed dividend to preferred
shareholders. The value of the proceeds allocated to the beneficial conversion
feature was approximately $3.5 million and was recognized in fiscal 2000 as a
return to the preferred shareholders at the date of issuance since the Series B
Preferred is immediately convertible.
Preferred Warrants
As described above in the sections entitled Series C Convertible Preferred
Stock and Series D Convertible Preferred Stock, the Company issued certain
warrants to purchase preferred stock to the Holders of both the Series C & D
Convertible Preferred Stock. The warrants are subject to adjustments to prevent
dilution under the same terms as the Series C & D Convertible Preferred Stock.
Common stock
During fiscal 2004, the Company issued 3,743,470 shares, 324,242 shares and
791,822 shares of common stock as a result of shareholder conversions of Series
F Preferred, Series G Preferred and Series H Preferred, respectively.
During fiscal 2004, the Company issued 42,500 shares of restricted common
stock to members of the board of directors for their service to the board. The
stock vests one year from the date of grant. The Company will amortize the
expense of approximately $44,570 in the statement of operations based on the
fair market value of the common stock as determined on the date of grant using
the closing price of the Company's common stock as quoted on the NASDAQ system
over the vesting period.
During fiscal 2003, the Company issued 705,436 shares of common stock as a
result of shareholder conversions of Series F Preferred and 820,145 shares of
common stock as a result of shareholder conversions of Series D Preferred.
During fiscal 2002, the Company issued 25,448 shares of common stock as a
result of shareholder conversions of Series F Preferred and 152,787 shares of
common stock as a result of shareholder conversions of Series D Preferred.
Stock Options and Warrants
The Company currently sponsors the 1995 Stock Option Plan, the 2000 Stock
Option Plan and the 1996 Director Stock Option Plan. These plans provide for
the issuance of up to 2,670,996 shares. Options may be granted to employees,
directors and consultants. With the exception of the 2000 Stock Option Plan,
option prices are not less than the fair market value of the Company's common
stock on the date of grant. In the case of the 2000 Stock Option Plan,
non-statutory options may be granted at not less than 85% of the fair market
value of the Company's common stock on the date of grant. The majority of the
options vest annually in equal amounts over a three-year period. The 2000 Stock
Option Plan also allows for the issuance of performance shares or restricted
stock. As of July 3, 2004, there were 42,500 shares of restricted stock
outstanding. No restricted stock or performance shares were outstanding as of
June 28, 2003 or June 29, 2002.
45
VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
The Company has 1,497,252 shares available for grants under the option plans
at July 3, 2004.
A summary of the status of the Company's stock option plans as of July 3,
2004 and activity during the three fiscal years then ended is presented below:
Options Outstanding Weighted-
Under the Plan Average
------------------ Exercise
ISO Non-ISO Price
-------- -------- ---------
Balance at June 30, 2001................ 360,987 471,585 $32.72
Granted.............................. 497,849 220,032 6.72
Exercised............................ (28,637) (25,001) 3.73
Forfeited............................ (217,605) (111,000) 47.58
-------- --------
Balance at June 29, 2002................ 612,594 555,616 13.90
Granted.............................. 480,750 -- 1.89
Forfeited............................ (184,050) (43,000) 7.35
-------- --------
Balance at June 28, 2003................ 909,294 512,616 10.88
Forfeited............................ (433,717) (15,180) 6.27
-------- --------
Balance at July 3, 2004................. 475,577 497,436 $13.01
======== ========
Options Outstanding Options Exercisable
--------------------------------------------- -------------------
Weighted-
Average
Remaining Weighted- Weighted-
Contractual Average Average
Range of Life (in Exercise Exercise
Exercise Prices Number years) Price Number Price
--------------- ------- ----------- --------- ------- ---------
$ 1.87- 4.60 409,702 7.08 $ 1.95 205,024 $ 2.01
5.80- 9.55 337,919 6.64 6.58 295,475 6.64
10.00-17.50 25,432 3.51 12.83 23,057 13.02
22.50-34.38 57,760 5.32 27.37 57,760 27.37
54.38 142,200 5.92 54.38 142,200 54.38
------- -------
973,013 6.56 $13.01 723,516 $16.57
======= =======
During fiscal 2003, the Company issued 480,750 incentive stock options to
employees in consideration for the employees entering into non-compete
agreements. The fair value of these stock options amounted to approximately
$382,000 and will be recognized as expense in the statement of operations over
the three-year vesting period of the options. Expense recognized in fiscal 2004
and 2003 related to these stock options was $127,000 and $127,000, respectively.
During fiscal 2002, the Company issued 150,000 non-statutory stock options
to two of the its board members at 85% of the fair market value of the
Company's common stock on the date of grant. The expense associated with the
options amounted to approximately $338,000 and is being recognized in the
statement of operations over the three-year vesting period of the options.
Expense recognized in fiscal 2004, 2003 and 2002 related to these stock options
was $113,000, $112,000 and $28,000, respectively.
In fiscal 2002, the Company issued four non-qualified stock options outside
of the Company's 2000 Stock Option Plan to four employees for the purchase of
20,000 shares of common stock at a purchase price of $6.25 per share.
46
VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
A summary of the common stock warrants outstanding at July 3, 2004 is as
follows:
Common Stock Warrants Outstanding
----------------------------------------------------
Weighted-
Average Weighted-
Remaining Average
Range of Contractual Exercise
Exercise Prices Number Life (in years) Price
--------------- ---------- --------------- ---------
$ 0.01- 0.05.. 9,606,820 4.72 $ 0.01
0.22- 3.60.. 649,005 2.40 2.83
4.25- 8.75.. 183,290 1.89 8.42
14.65-25.13.. 15,970 0.76 20.52
31.88-64.63.. 19,488 1.70 51.01
----------
10,474,573 4.51 $ 0.46
==========
On February 12, 2004, the Company issued 3,456,663 common stock warrants to
certain members of the Company's management. The warrants are initially
exercisable into one share of common stock per warrant, have an exercise price
of $0.01 per share and a term of seven years. Warrants granted in connection
with offers of employment are immediately exercisable upon their grant. All
other warrants granted are not exercisable until shareholder approval of their
issuance is obtained. Holders of such warrants have agreed to surrender these
warrants if shareholder approval of their issuance is not obtained in the next
annual shareholder meeting. These warrants, by their terms, provide for an
anti-dilution adjustment to the number of shares of common stock into which the
warrants are exercisable in the event that the Company issues other equity
instruments that would result in dilution to the holders of the warrants. In
the event the Company issues or sells any shares of common stock or securities
convertible into or exercisable for common stock for a consideration per share
of common stock of less than the market price of the common stock, determined
as of the date of the initial issue or sale, the exercise rate of the warrants
shall be proportionately adjusted to prevent dilution. As of July 3, 2004, each
warrant is exercisable into 1.097 shares of common stock. The fair value of the
warrants was approximately $2.6 million, which was included in compensation
expense in the statement of operations during the fiscal year. Further
expansion of the management team may result in additional warrant issuances and
related compensation charges.
In fiscal 2003, the Company issued 30,000 common stock warrants at an
exercise price of $3.08 per share and 10,000 common stock warrants at an
exercise price of $8.25 per share to consultants in exchange for services
rendered. The term of the warrants is five years. The fair value of the
warrants was approximately $78,000 and was included in compensation expense in
the statement of operations.
Earnings Per Share
Basic earnings per share is computed based on the weighted average number of
common shares outstanding by dividing net income or loss applicable to common
shareholders by the weighted average number of common shares outstanding for
the period. Diluted earnings per share reflects the potential dilution that
could occur if securities or other obligations to issue common stock such as
options, warrants or convertible preferred stock, were exercised or converted
into common stock that then shared in the earnings of the Company. For all
periods presented, diluted net loss per share is equal to basic net loss per
share because the effect of including such securities or obligations would have
been antidilutive.
47
VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
The following table presents a reconciliation of the numerators and
denominators of basic and diluted earnings per share for fiscal 2004, 2003 and
2002:
Year Ended
--------------------------------
July 3, June 28, June 29,
2004 2003 2002
-------- -------- --------
(Amounts in thousands, except per
share data)
Numerator
Net loss............................................................... $(47,836) $(12,259) $(10,479)
Beneficial conversion feature.......................................... -- -- (2,700)
Adjustment of Common Warrants issued in connection with sale of Series
F Preferred to market value.......................................... -- -- (258)
Accretion of Series B Redeemable Preferred Stock to its redemption
value................................................................ -- -- (348)
Accretion of Series D Redeemable Preferred Stock to its redemption
value................................................................ -- -- (182)
Value of Common Warrants issued in connection with sale of Series H
Preferred............................................................ -- (2,475) --
Beneficial conversion feature for Series H Preferred................... -- (875) --
Beneficial conversion feature for Series I Preferred................... (25,215)
Beneficial conversion feature for Series J Preferred................... (4,632)
Adjustment of Preferred Series C Warrants to market value.............. -- -- (3,770)
Adjustment of Preferred Series D Warrants to market value.............. -- -- (2,620)
-------- -------- --------
Net loss applicable to common shareholders............................. $(77,683) $(15,609) $(20,357)
======== ======== ========
Denominator for basic and diluted loss per share Weighted average shares.. 7,038 4,606 3,500
======== ======== ========
Basic and Diluted Loss Per Share.......................................... $ (11.04) $ (3.39) $ (5.82)
======== ======== ========
The following table presents securities that could potentially dilute basic
earnings per share in the future. For all periods presented, the potentially
dilutive securities were not included in the computation of diluted earnings
per share because to do so would have been antidilutive:
July 3, June 28, June 29,
2004 2003 2002
------- -------- --------
(Amounts in thousands)
Stock options........................... -- 19 224
Common warrants......................... 7,469 1,950 487
Preferred warrants:
Series C Convertible Preferred....... 3,623 907 735
Series D Convertible Preferred....... 2,321 565 461
Convertible preferred stock:
Series B Convertible Preferred....... 17,798 4,580 3,721
Series C Convertible Preferred....... 8,808 2,214 1,785
Series D Convertible Preferred....... 16,459 4,729 4,224
Series F Convertible Preferred....... 18,204 6,462 4,235
Series G Convertible Preferred....... 5,207 1,428 187
Series H Convertible Preferred....... 18,524 2,644 --
Series I Convertible Preferred....... 115,677
Series J Convertible Preferred....... 6,559
------- ------ ------
220,649 25,498 16,059
======= ====== ======
48
VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
9. INCOME TAXES
The significant components of deferred income tax assets and liabilities,
primarily long-term, were as follows (amounts in thousands):
July 3, June 28,
2004 2003
-------- --------
Deferred Assets:
Federal net operating loss carryforward......... $ 54,148 $ 38,555
A/R direct write off............................ 1,657 --
Bad Debt........................................ 1,803 869
Accrued Legal Fees.............................. 1,006 1,418
Accrued Compensation............................ 236 (1)
Accrued Audit Fees.............................. 107 --
Self Insurance--Vehicle......................... 1,352 1,071
Self Insurance--Workers' Compensation Insurance. 2,241 2,932
Other........................................... 13 14
-------- --------
Total deferred tax benefit.................. 62,563 44,858
Deferred tax liabilities........................ -- (5)
-------- --------
62,563 44,853
Less valuation allowance........................ (62,563) (44,853)
-------- --------
Net deferred tax asset.......................... $ -- $ --
======== ========
At July 3, 2004 the Company had net operating loss carry forwards for income
tax purposes of approximately $142.5 million, which expire 2005 through 2024.
Usage of a portion of the losses may be limited pursuant to Internal Revenue
Code Section 382.
The change in the valuation allowance was an increase of $17.9 million, $4.9
million and $5.3 million in fiscal years 2004, 2003 and 2002, respectively, and
resulted principally from net operating loss carry forwards.
10. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases equipment, vehicles, and buildings under non-cancelable
leases. Future minimum lease commitments under non-cancelable leases as of July
3, 2004 were as follows (amounts in thousands):
Fiscal year:
2005....... $ 9,108
2006....... 6,046
2007....... 4,317
2008....... 1,739
2009....... 486
Thereafter. 41
-------
$21,737
=======
49
VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Rent expense was $18.6 million, $15.5 million and $16.5 million during the
years ended July 3, 2004, June 28, 2003 and June 29, 2002, respectively.
Automobile and Workers' Compensation Liabilities
The Company is partially self-insured for automobile, workers' compensation
and cargo claims. The Company has elected to retain a portion of expected
losses through the use of deductibles. Provisions for losses expected under
these programs are recorded based upon the Company's estimates of the aggregate
liability for claims incurred. These estimates include the Company's actual
experience based on information received from the Company's insurance carriers
and historical assumptions of development of unpaid liabilities over time. The
Company pre-funds this estimated liability on a monthly basis based upon
actuarial loss projections. As of July 3, 2004 and June 28, 2003, the Company
has deposits recorded of $6.3 million and $7.4 million, respectively.
The Company has established reserves for automobile and workers'
compensation liabilities, which it believes, are adequate. The Company reviews
these matters, internally and with outside brokers, on a regular basis to
evaluate the likelihood of losses, settlements and litigation related expenses.
The Company has managed to fund settlements and expenses through cash flow and
believes that it will be able to do so going forward. There have not been any
losses that have differed materially from the accrued estimated amounts.
Litigation
The Company is subject to legal proceedings and claims that arise in the
ordinary course of their business. The Company determined the size of its legal
reserve with respect to these matters in accordance with generally accepted
accounting principles based on management's estimate of the probable liability.
In the opinion of management, none of these legal proceedings or claims is
expected to have a material effect upon the Company's financial position or
results of operations. However, the impact on cash flows might be material in
the periods such claims are settled and paid.
11. EMPLOYEE BENEFIT PLANS
The Company has defined contribution retirement plans (the "Plans") in
accordance with Section 401(k) of the Internal Revenue Code. All full-time
employees of the Company and its subsidiaries are eligible to participate in
the Plans. Company contributions to these plans are discretionary. The Company
made no matching contributions for fiscal years 2004, 2003 or 2002.
12. RELATED PARTY TRANSACTIONS
Mr. Vincent A. Wasik serves as the Company's Chief Executive Officer
pursuant to a Contractor Services Agreement, effective as of July 28, 2003,
between the Company and MCG Global LLC. Mr. Wasik is an owner and principal of
MCG Global LLC and was a shareholder and Chairman of the Board of the Company
at the time this Contractor Services Agreement was authorized and entered into.
The Service Agreement sets forth the rights and duties of both the Company and
Mr. Wasik and directs the Company's Compensation Committee to establish, on an
annual basis, Mr. Wasik's compensation level and eligibility for salary
increases, bonuses, benefits and grants of equity. The Service Agreement also
allows Mr. Wasik to contract to provide similar services to other businesses as
long as Mr. Wasik abides by his confidentiality obligations under the Service
Agreement. Furthermore, the Company has agreed to indemnify and hold harmless
MCG, its officers, directors, employees and agents, including Mr. Wasik, from
liabilities arising out of any services rendered by MCG to the Company, other
than as a result of gross negligence or willful misconduct. The Company also
agreed to cause
50
VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
MCG and Mr. Wasik to be named as additional insured parties under its Directors
and Officers Liability insurance policies. The Service Agreement does not
contain any fixed term and may be terminated by either party at any time upon
written notice. Other than payment of outstanding fees and expenses owed to MCG
at termination, the Service Agreement does not contain any obligation upon the
Company to pay severance in the event the agreement is terminated by the
Company. During the fiscal year 2004, Mr. Wasik and MCG were reimbursed $31,535
and $107,535, respectively for expenses incurred on the Company's behalf. In
addition the Company paid $410,000 and issued $465,000 of Preferred Stock to
MCG in lieu of cash for continuing and specific services rendered in addition
to Mr. Wasik's compensation; of these amounts the Company recorded compensation
expense of $510,000 to Mr. Wasik through MCG for these services and the
remainder is recorded in SG&A for rent and management services. During fiscal
2004, the Company also reimbursed a major investor, TH Lee Putnam Ventures LLP
("THLPV") $46,125 for expenses incurred on the Company's behalf. THLPV also
provides the Company with a standby Letter of Credit guarantee of $7.5 million
in support of the Company's revolving credit facility.
The Company has a business relationship with Peritas, LLC ("Peritas"), a
vehicle rental company wholly owned by THLPV. Peritas was initially formed and
owned by MCG Global, LLC. The founder and principal of MCG Global LLC is
Vincent Wasik, the Chairman of the Board and CEO of the Company. MCG
established Peritas to accommodate the Company's need for the Peritas services
pending a new owner. Neither MCG nor Mr. Wasik has received any revenue,
compensation or benefit from short term ownership or management of Peritas and
Peritas was transferred to THLPV for no compensation or consideration. The
business of Peritas is to rent delivery vehicles to independent contractors who
perform services for the Company and other companies. On May 24, 2004, the
Company and Peritas entered into an Agency Agreement whereby the Company acts
as an agent for Peritas for the purposes of vehicle rentals. The term of the
agreement is for twelve months. The services performed by the Company under the
Agency Agreement include, renting the vehicles to independent contractors,
maintenance of the vehicles and collecting the rental fees and delivering the
fees to Peritas. Under the Agency Agreement, the Company receives a 10%
commission of all rental revenues and a reimbursement of any vehicle related
expenses. To date, the Company has collected rental revenues and received
commissions. The Company's Audit Committee approved the business relationship
between the Company and Peritas. [See footnote 5 CONSOLIDATED FINANCIAL
INTEREST ENTITY]
In fiscal 2003, the Company issued $0.2 million of Series H Preferred as
compensation for these services.
In fiscal 2002, the Company granted a total of 245,000 warrants to purchase
common stock. 200,000 of the warrants are five-year common stock warrants with
an exercise price of $2.00 per share. The fair value of the warrants was
determined on the date of grant using the Black-Scholes option pricing model,
assuming expected volatility of 121%, a risk-free interest rate of 4%, and
expected life of five years. The remaining 45,000 warrants are five-year
warrants, having an exercise price of $8.10 per share, and were priced at fair
market value on the date of grant based on the closing price of the Company's
common stock as quoted on the NASDAQ system. Cash and warrant-based
compensation for these services amounted to $1.8 million in fiscal 2002.
13. LIQUIDITY
The Company reported a loss from operations of approximately $44.3 million
for fiscal 2004; and, has negative working capital of approximately $35.5
million at July 3, 2004, primarily due to the classification of the revolving
credit facility as a current liability, and the write-off of certain Accounts
Receivable balances.
On March 31, 2004 and July 1, 2004, the Company entered into the third and
fourth amendments, respectively, to the amended and restated revolving credit
facility with Fleet. The purpose of these amendments was to reset certain of
the financial covenants provided for in the agreement discussed above. In
connection with amending and restating the revolving credit facility and
obtaining the senior subordinated note, the Company was
51
VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
required to obtain an additional $25.2 million of investment capital. As part
of this equity raise, the Company borrowed $1.0 million during the first
quarter from an individual investor with an agreement to repay the principal
and interest within 90 days. During the second quarter, the indebtedness to the
individual investor plus the interest thereon as well as $0.1 million of other
borrowings were converted to Series I Convertible Preferred Stock.
At July 3, 2004, the Company had in place waivers of its financial debt
covenants related to its revolving credit facility and its senior subordinated
debt facility. These waivers are in effect through January 1, 2005; and
pursuant to the Company's receipt of $21.0 million of investment capital [See
footnote 14 SUBSEQUENT EVENTS], on December 21, 2004 the Company obtained
waivers and consents from its lenders. The lenders waived all existing defaults
and delayed the start date for the financial covenants for both minimum EBITDA
and interest coverage ratio until the earlier of January 1, 2007 and the date
upon which the (a) Company's EBITDA for each of two consecutive months equals
or exceeds the Company's fixed charges (interest expense and scheduled
principal payments due with respect to Money Borrowed) for the applicable month
and (b) Availability under the credit facility for each day of the immediately
preceding thirty days is greater than or equal to $1,000,000.
14. SUBSEQUENT EVENTS
. New Equity Investment
On December 21, 2004, the Company signed a purchase agreement to raise
approximately $21 million of new equity capital investment. The investment is
initially in the form of a convertible note that will automatically convert
into Series M Convertible Preferred Stock upon approval of the transaction by
the Company's shareholders. The proceeds will be used for general working
capital needs consistent with financial budgets approved from time to time by
the Company's Board of Directors. The Preferred Series M Stock will accrue
cumulative PIK dividends equal to 6% per annum. In the event the Company's
shareholders do not approve the transaction, the interest rate will increase to
19%. As part of the transaction, the investors required that the Company's
charter be amended in a number of respects, including a requirement that, upon
shareholder approval for the transaction, all preferred shareholders
automatically convert their shares of preferred stock to common stock. In the
event of any liquidation or winding up of the Company, the holders of the
Preferred Series M will be entitled to a preference on liquidation equal to one
times (1x) the original purchase price of the Preferred Series M Stock plus
accrued and unpaid dividends. A consolidation or merger of the Company or a
sale of substantially all of its assets shall be treated as a liquidation for
these purposes.
The investment will provide the Company with sufficient working capital
resources to provide for the anticipated liquidity needs for the fiscal year;
and to position the Company to accept definitive and available business with
existing and new customers by settling their respective concerns about the
Company's ability to service their respective business needs on a continuing
basis.
. Warrant to Purchase Common Stock
As part of the above-described Series M private placement, the new investors
required that TH Lee Putnam Ventures ("THLPV") reach an agreement to extend,
for a two-year period, the July 1, 2004 capital contribution agreement
previously entered into between THLPV and the lenders. Under the terms of the
capital contribution agreement, in the event that THLPV elects to not provide
further financial support for the Company, THLPV is required to notify the
Company's lenders of such decision and provide specific levels of financial
support for a thirty (30) day period following the notification. In exchange
for entering in to the capital contribution agreement, the lenders agreed to
waive certain financial covenants under the Company's credit facilities. At the
52
VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
time, THLPV did not receive any compensation in exchange for entering into the
capital contribution agreement. As part of the extension of the capital
contribution agreement the Company agreed to issue to THLPV, subject to
shareholder approval, a warrant to purchase shares of common stock equal to 1%
of the fully diluted common stock of the Company on a fully converted basis.
The term of the warrant will be five years and will have an exercise price of
$0.0001. Due to the pricing of the warrant, the Company expects to take a
charge.
. Series L Convertible Preferred Stock
On December 20, 2004, the Company's Board of Directors authorized the sale
of up to $7.0 million of Series L Convertible Preferred Stock ("Series L
Preferred") through a private placement. The purchaser will be TH Lee Putnam
Ventures and its related affiliates. The Company entered into a Stock Purchase
Agreement on December 21, 2004, pursuant to which the Company will sell,
pending shareholder approval, 7,000,000 shares of Series L Preferred to
investors for $1.00 per share for net proceeds of approximately $7.0 million.
The consideration for the Series L will consist of cancellation of the
Company's obligation to repay the investor the funds paid by the investor to
the Company's senior lender to support the Company's revolving credit facility.
The issuance of the Series L Preferred is subject to shareholder approval and
is non-voting unless it is converted into common stock. Additionally,
shareholder approval is required to increase the number of authorized shares of
the Company's common stock by an amount sufficient to provide for the issuance
of all of the preferred shares. TH Lee Putnam Ventures and MCG Global, who
control a majority of the shares have agreed to vote for such approvals. The
conversion price of the Series L Preferred is $0.10 per common share, and, at
the time the stock purchase agreements are executed, assuming that the Series L
Preferred were issued and convertible then, each share of Series L Preferred
will be convertible into ten shares of the Company's common stock. Based on the
pricing of the Series L Preferred, the sale of Series L Preferred is expected
to contain a beneficial conversion amounting to $7.0 million which will be
recognized as a deemed dividend to preferred shareholders at the time of the
sale and a charge against net income (loss) available to common shareholders.
. Peritas LLC
During November 2004, the Company's Consolidated Financial Interest Entity
was purchased by TH Lee Putnam Ventures from MCG Global. The Company will
continue, on a forward basis, to enjoy a strategic relationship with Peritas
pursuant to customer service and business development. As TH Lee Putnam
Ventures is a significant investor in the Company, the business relationship
and extent of interactivity will hereafter be disclosed along with related
party transactions. The future need to consolidate Peritas as a part of the
Company's financial statements will be determined based upon the requirements
as set forth in FIN No. 46.
. Issuance of Series K Preferred Stock
On June 30, 2004, the Company's Board of Directors authorized the sale of up
to $25 million of Series K Convertible Preferred Stock ("Series K Preferred")
through a private placement. Pursuant to a Stock Purchase Agreement entered
into on August 23, 2004, the Company sold, pending shareholder approval,
7,266,666 shares of Series K Preferred to investors for $1.50 per share and
received net proceeds of approximately $10.9 million. The issuance of the
Series K Preferred is subject to shareholder approval and is non-voting unless
it is converted into common stock. Additionally, shareholder approval is
required to increase the number of authorized shares of the Company's common
stock by an amount sufficient to provide for the issuance of all the preferred
shares. TH Lee Putnam Ventures and MCG Global, who control a majority of the
shares have agreed to vote for such approvals. The initial conversion price of
the Series K Preferred is $0.15 per common share, and, at the time the stock
purchase agreements were executed, assuming that the Series K Preferred were
issued and convertible then, each share of Series K Preferred was convertible
into ten shares of the Company's common stock. Both the conversion price and
the number of common shares into which the Series K Preferred is convertible
are subject
53
VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
to adjustment in order to prevent dilution. This sale of Series K Preferred was
deemed to have contained a beneficial conversion amounting to $10.9 million
which was recognized as a deemed dividend to preferred shareholders at the time
of the sale. The Company began selling its Series K Preferred on August 23,
2004. On December 21, 2004, the Company sold 2,584,800 additional shares of
Series K Preferred for net proceeds of approximately $3.9 million to complete
its sales of Series K Preferred. Upon completion of the sale of the Series K
Preferred in the second fiscal quarter of 2005, the Company will be required to
recognize a charge against net income (loss) available to common shareholders
of approximately $3.9 million to reflect the beneficial conversion in the
Series K Preferred.
15. QUARTERLY FINANCIAL INFORMATION (unaudited)
Unaudited summarized financial data by quarter for fiscal years 2004 and
2003 is as follows (in thousands, except per share data):
Three Months Ended(1)
---------------------------------------------
July 3, March 27, December 27, September 27,
2004 2004 2003 2003
-------- --------- ------------ -------------
Revenue..................................... $ 72,023 $67,986 $ 71,270 $76,639
Gross profit................................ 9,087 11,463 13,461 15,587
(Loss) from operations...................... (25,920) (9,229) (8,461) (732)
Net (loss) applicable to common shareholders (31,247) (9,786) (34,877) (1,773)
Basic net (loss) per share.................. $ (4.09) $ (1.31) $ (6.38) $ (0.33)
======== ======= ======== =======
Diluted net (loss) per share................ $ (4.09) $ (1.31) $ (6.38) $ (0.33)
======== ======= ======== =======
- --------
(1) As part of the Company's fiscal year-end close expenses were identified
that may have a material impact on the reported results of prior fiscal
quarters. Management's attempts to accurately quantify the extent of the
required inter-quarter reclassification(s), and then to assess the need to
restate prior quarters' reported results, have been precluded from
definitive completion by the very weaknesses identified herein. As such,
attempts to completely quantify and accurately allocate quarter-specific
amounts were not possible and therefore all fiscal year-end adjustments
were recorded as part of the Company's fourth quarter results. Corrections
of the underlying weaknesses have been identified, and annual fiscal
results are fairly stated.
Three Months Ended
----------------------------------------------
June 28, March 29, December 28, September 28,
2003 2003 2002 2002
-------- --------- ------------ -------------
Revenue............................... $ 77,844 $76,335 $75,041 $77,918
Gross profit.......................... 14,934 16,305 16,853 17,910
Income (loss) from operations(1)...... (8,786) (1,201) 16 984
Net income (loss) applicable to common
shareholders........................ (12,254) (2,464) (1,049) 158
Basic net income (loss) per share..... $ (2.28) $ (0.53) $ (0.24) $ 0.04
======== ======= ======= =======
Diluted net income (loss) per share... $ (2.28) $ (0.53) $ (0.24) $ 0.01
======== ======= ======= =======
- --------
(1) Includes charges in the fourth quarter associated with the valuation of
certain accounts receivable of $4.0 million and various claims amounting to
$1.9 million
54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
The Company's Audit Committee and its Chief Executive Officer and Chief
Financial Officer (the "Certifying Officer") have evaluated the effectiveness
of the design and operation of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended) as of the end of the period covered by this annual report on
Form 10-K. Based on this evaluation, the Certifying Officer concluded that
these disclosure controls and procedures were deficient to ensure that the
information required to be disclosed in our reports filed or submitted under
the Securities Exchange Act of 1934 (as amended) is accurate, and is recorded,
processed, summarized and reported within the requisite time periods.
Deficiencies resulted from the Company's relocation of its finance function
during the second half of the fiscal year, and substantial management and staff
turnover, resulting in the loss of operations and process knowledge.
In connection with the preparation of the Company's consolidated financial
statements for the year ended July 3, 2004 certain significant internal control
deficiencies became evident to management that, in the aggregate, represent
material weaknesses, including, inadequate staffing and supervision leading to
the untimely identification and resolution of certain accounting matters;
failure to perform timely cutoff and reviews, substantiation and evaluation of
certain general ledger account balances; inadequate procurement procedures;
lack of procedures or expertise needed to prepare all required disclosures; and
evidence that employees lack the experience and training to fulfill their
assigned functions. A material weakness is a significant deficiency in one or
more of the internal control components that alone or in the aggregate
precludes the Company's internal controls from reducing to an appropriately low
level the risk that material misstatements in its financial statements will not
be prevented or detected on a timely basis.
As part of the Company's year-end closing, expenses were identified which
may have a material impact on the reported results of prior fiscal quarters.
Management's attempts to accurately quantify the extent of the required
inter-quarter reclassification(s), and then to assess the need to restate prior
quarters' reported results, have been precluded from definitive completion by
the very weaknesses identified herein. As such, attempts to completely quantify
and accurately allocate quarter-specific amounts were not possible, and
therefore all fiscal year-end adjustments were recorded as part of the
Company's fourth quarter results. Corrections of the underlying weaknesses have
been identified, and annual fiscal results are fairly stated.
At the direction of the Audit Committee, management has continued to review
how the deficiencies in internal control occurred and will proceed
expeditiously with its existing plan to enhance internal controls and
procedures, which it believes addresses each of the issues. The Company plans
to add financial expertise with the hiring of an experienced Controller to
provide hands-on oversight of the monthly financial closing, data analysis,
account reconciliation and cutoff. The Company has also designated specialists
in its Billings & Collections group to work hand-in-hand with problem accounts
to ensure that billings are rendered in a timely and appropriate fashion for
timely customer processing and payment. This group also spearheads problem
resolution. In addition, the Company has moved to purge inactive accounts from
its vendor file and has implemented a system of invoice processing and approval
built upon multiple levels of active and passive reviews starting with
system-required authorized vendor numbers and ending with review by an
authorized signer.
55
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
Name Age Position
---- --- --------
Vincent A. Wasik.......... 59 Chairman of the Board, Chief Executive Officer
and Interim CFO
James Brown............... 40 Director
Douglas Hsieh............. 34 Director
Alex Paluch............... 48 Director
Richard A. Kassar......... 57 Director
Leslie E. Grodd........... 58 Director
John J. Perkins........... 73 Director
Wesley C. Fredenburg...... 53 General Counsel and Secretary
Andrew B. Kronick......... 41 Senior Vice President, Sales
Kay Perry................. 44 Senior Vice President, Workforce Resources
Jeffrey Hendrickson....... 59 President and Chief Operating Officer
Vincent A. Wasik. Mr. Wasik was appointed as the Company's Chairman of the
Board in August 2001 and was further appointed the Company's President and
Chief Executive Officer on July 28, 2003. In 1995, Mr. Wasik co-founded MCG
Global, a private equity firm sponsoring leveraged buyout acquisitions and
growth capital investments and has served as Principal of MCG Global since that
time. From 1988 to 1991, Mr. Wasik served as Chairman and CEO of National Car
Rental System, Inc. From 1980 to 1983, he served as President and CEO of
Holland America Line. Mr. Wasik currently serves as an advisory board member of
Mitchells/Richards, the largest upscale clothing retailer in Connecticut.
James G. Brown. Mr. Brown was elected to the Company's Board in July 2000.
Mr. Brown is a founder and Managing Director of TH Lee Putnam Ventures, L.P., a
$1 billion private equity fund focused exclusively on Internet and eCommerce
companies. Previously, from 1995 to 1999, he served as a Senior Vice President
and Industry Leader of GE Equity where he was responsible for strategic and
financial investments in eCommerce/Internet, consumer services and
media/entertainment companies. Prior to joining GE Equity, Mr. Brown worked
with Lehman Brothers as a Vice President from 1994 to 1995. Before that, he
served at Bain & Co., an international consulting firm, from 1992 to 1994. He
began his career in the media industry, serving two years with A.C. Nielsen in
research and two years with CBS Television Network in marketing. In addition to
the Company, Mr. Brown is a director of HomePoint Corp., FaceTime
Communications, Inc., Prescient Markets, RealPulse.com, Inc. and LN Holdings,
Inc.
Douglas Hsieh. Mr. Hsieh was appointed to the Company's Board in January
2001. Mr. Hsieh has been a Principal at TH Lee Putnam Ventures since June 1999.
From January 1998 until May 1999, Mr. Hsieh was at GE Equity, focusing on
Internet and media-related investments. From 1994 until December 1997, Mr.
Hsieh was employed at Lehman Brothers as Assistant Vice President of Strategic
Planning. Before that, he was a Financial Analyst with Dillon Read, Inc.
Alex Paluch. Mr. Paluch was appointed to the Board of Directors in August
2001. Mr. Paluch is a General Partner at East River Ventures Partnership, an
investment firm, focused in part on emerging technology-driven companies. Mr.
Paluch currently serves on the board of directors of Equity Enterprises, Inc.
Richard A. Kassar. Mr. Richard Kassar was appointed to the Board in August
2002. Mr. Kassar has been employed as Senior Vice President and Chief Financial
Officer of The Meow Mix Company since February 2002. From May 2001 to January
2002, he was self-employed as a consultant to venture capital firms, advising
56
them primarily on the acquisition of consumer brands. From December 1999 to May
2001, Mr. Kassar was employed as Co-President and Chief Financial Officer of
Global Household Brands. From 1986 to December 1999, he was employed by Chock
Full O'Nuts in various positions, and most recently served as Senior Vice
President and Chief Operating Officer. Mr. Kassar also serves as a director for
World Fuel Services, Inc.
Leslie E. Grodd. Mr. Leslie Grodd was appointed to the Board in January
2003. A Certified Public Accountant, Mr. Grodd has been a Principal in the law
firm of Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut since 1974.
Prior to forming the law firm, Mr. Grodd was associated with the firm of
Coopers & Lybrand (now PricewaterhouseCoopers). Mr. Grodd is the former chair
of both the Federal Tax Committee of the Connecticut Society of Certified
Public Accountants and the Executive Committee of the Tax Section of the
Connecticut Bar Association. Mr. Grodd holds a Master of Business
Administration Degree from New York University, a Bachelor of Arts Degree from
the University of Vermont and a Juris Doctor Degree from the St. John's
University School of Law.
John J. Perkins. Mr. Perkins was appointed to the Board in August of 2004.
Since 1984 Mr. Perkins has served as the President of International Insurance
Group, Ltd. and is currently the Chairman of the Board of that company.
Beginning in 1974 Mr. Perkins has also served as a Trustee of the City of
Boston Retirement Fund. Between 1974 and 1984, Mr. Perkins was the President of
Corroon and Black of Massachusetts. Additionally, Mr. Perkins is the President
of Somerset Corporate Advisors, a financial advisory firm, and is a member of
the Advisory board of Glasshouse Technologies, Aircuity, Inc., and Tuckerbrook
Alternative Investments. Mr. Perkins is a graduate of Boston College with a
degree in economics.
Wesley C. Fredenburg. Mr. Fredenburg was appointed General Counsel and
Secretary in December 2000. Prior to joining the Company from February of 1997
until August 2000, Mr. Fredenburg served as General Counsel for the Automotive
Rental Group of AutoNation, Inc. From December 1995 until February 1997, Mr.
Fredenburg served as the General Counsel of National Car Rental Systems, Inc.
Prior to that, he was a partner in the law firm of Crowe and Dunlevy.
Andrew B. Kronick. Mr. Kronick joined Velocity Express in December 2001 as
its Senior Vice President of National Accounts and Logistics Services. In
fiscal 2004, Mr. Kronick was named Senior Vice President, Sales. Prior to
joining the Company, from December 1999 to October 2001, Mr. Kronick served as
President of Veredex Logistics and was co-founder of deliverEnow.com, both
technology and same-day logistics solutions companies. Prior to that, from
November 1995 to December 1999, he served as Corporate Vice President of Sales
and Marketing of Consolidated Delivery & Logistics, a national provider of
time-critical logistics solutions, a company of which he was a founding member.
Kay Perry. Ms. Perry joined Velocity Express in February 2000 as its
Director of Compensation and Benefits. In November 2001, she was named the
Company's Vice President of Compensation and Benefits. In September 2002, she
was named Vice President Human Resources, and served in that capacity until
August 2004 when she was named Senior Vice President, Workforce Resources.
Prior to joining the Company, Ms. Perry was the Manager Compensation and
Benefits for Fleetwood Retail Corporation.
Jeff Hendrickson. Mr. Hendrickson joined the Company in December 2003 as
its President and Chief Operating Officer. Prior to joining Velocity Express,
from June 2002 to December 2003, Mr. Hendrickson was President and Chief
Executive Officer of Sport & Health Company, a privately held company
headquartered in McLean, Virginia. From November 2000 to May 2002, Mr.
Hendrickson was the President and Chief Operating Officer of BC Harris
Publishing Company, Inc. From April 2000 until December 2000, Mr. Hendrickson
served as Executive Vice President, Operations for Park N' View, Inc. Park N'
View, Inc. filed for protection under Chapter 11 of the Federal Bankruptcy Laws
in December 2000. He has also served in a senior executive capacity for such
organizations as Brinks, Inc., National Car Rental System, Inc., Chase
Manhattan Corporation, and Hertz Corporation.
There are no family relationships between directors or executive officers of
the Company.
57
Audit Committee
The Company's Audit Committee consists of the following individuals: Richard
A. Kassar, Chairman, Leslie E. Grodd, and John J. Perkins. The Board of
Directors has determined that each Audit Committee member has sufficient
knowledge in financial and auditing matters to serve on the Committee. In
addition, the Board has determined that Richard A. Kassar is an "audit
committee financial expert" as defined by Securities and Exchange Commission
("SEC") rules. The members are independent and have met several times in
discussion and review of the Company's audit efforts.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and officers and the holders of 10% or more of the
Company's stock to file with the Securities and Exchange Commission initial
reports of changes in ownership of equity securities of the Company. Based on
the Company's review of copies of such reports received by it, or written
representations from reporting persons, the Company believes that during fiscal
2004, its directors, executive officers and holders of 10% or more of the
Company's stock filed all reports on a timely basis except as follows:
The Company believes the following holders of 10% or more of the Company's
stock have not timely filed or have not filed Form 4s with respect to the
following transactions: Richard Neslund with respect to changes in beneficial
holdings as a result of antidilution adjustments to preferred stock; HomePoint
Liquidating Trust with respect to changes in beneficial holdings as a result of
antidilution adjustments to preferred stock; Jess S. Morgan & Company Inc. with
respect to the purchase of preferred stock, the conversion of preferred stock
to common stock and with respect to changes in beneficial holdings as a result
of antidilution adjustments; and BPEF 2 Pegasus Limited with respect to the
acquisition of preferred stock.
Code of Business Conduct and Ethics
The Company has adopted a Code of Business Conduct and Ethics ("Code of
Ethics") which applies to the Company's directors, officers and employees. The
Code of Ethics is published on the Company's website at www.velocityexp.com
under "Investor Info." Any amendments to the Code of Ethics and waivers of the
Code of Ethics for the Company's Chief Executive Officer or Chief Financial
Officer will be published on the Company's website.
58
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal years ended July 3, 2004,
June 28, 2003 and June 29, 2002, the aggregate compensation paid or accrued
with respect to the Company's Chief Executive Officer and up to the four most
highly compensated executive officers other than the Chief Executive Officer
who were serving as executive officers as of July 3, 2004 (the "Named Executive
Officers"), based upon salary and bonus earned by such executive officers and
individuals in fiscal 2004.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
Long-Term
Compensation
Annual Compensation Awards
----------------------------- ---------------------
Restricted Securities
Other Annual Stock Underlying
Name and Principal Position Year Salary Compensation(2) Awards(3) Options(4)
--------------------------- ---- -------- --------------- ---------- ----------
Vincent A. Wasik(1).............. 2004 $510,000 $13,965 -- --
Chief Executive Officer 2003 -- -- $6,480 --
2002 -- -- -- 12,500
Jeffry J. Parell................. 2004 81,490 405 -- --
Chief Executive Officer 2003 346,827 4,925 -- --
2002 334,556 6,828 -- 140,000
Andrew B. Kronick................ 2004 253,077 -- -- 365,764
Senior Vice President, Sales 2003 195,923 3,245 -- --
2002 103,846 3,821 -- 10,000
Wesley C. Fredenburg............. 2004 237,981 -- -- 365,764
General Counsel 2003 216,346 -- -- --
and Secretary 2002 221,397 8,000 -- 50,000
Jeffrey Hendrickson.............. 2004 161,538 -- -- 1,097,294
President and Chief Operating 2003 -- -- -- --
Officer of Velocity Express 2002 -- -- -- --
Robert B. Lewis.................. 2004 138,462 -- -- 1,097,294
Chief Financial Officer 2003 -- -- -- --
2002 -- -- -- --
- --------
(1) Mr. Wasik serves as the Company's Chief Executive Officer pursuant to an
agreement between the Company and MCG Global, LLC ("MCG"). Mr. Wasik is an
owner and principal of MCG. His compensation is paid through MCG.
(2) For 2004, includes health insurance premiums for Mr. Wasik and vehicle
allowance for Mr. Parell. For 2003, represents vehicle allowance for
Messrs. Parell and Kronick. In 2002, includes $6,209 for vehicle allowance
and $619 for premiums on a term life insurance policy for Mr. Parell, a
retention payment for Mr. Fredenburg agreed to upon the Company hiring Mr.
Fredenburg in December 2000 as set forth in his employment contract, and
vehicle allowance for Mr. Kronick.
(3) For 2003 includes 9,000 shares of restricted stock granted to Mr. Wasik on
February 21, 2003 for his service on the Board of Directors. The stock
vested one year from the date of grant. On July 3, 2004, the aggregate
value of the restricted stock holdings was $4,050.
(4) In 2004, represents the number of shares of common stock underlying
warrants granted. 333,333 warrants were granted to both Messrs. Kronick and
Fredenburg. The warrants have an exercise price of $0.01 per share, a term
of seven years and are immediately exercisable after shareholder approval
of the issuance of
59
the warrants. 1,000,000 warrants were granted to both Messrs. Hendrickson
and Lewis in connection with their offers of employment with the Company.
The warrants have an exercise price of $0.01 per share, a term of seven
years and are immediately exercisable. The warrants provide for additional
shares of common stock upon exercise of the warrants in the event that the
Company issues other equity instruments that would result in dilution to the
holders of the warrants. As of July 3, 2004, each warrant is exercisable
into 1.097 shares of common stock. In 2002, represents stock options granted
with exercise prices equal to or not less than fair market value on the date
of grant. In 2002, 5,000 options granted to Mr. Parell and 5,000 options
granted to Mr. Fredenburg were granted outside the Company's 1995 or 2000
Stock Option Plans. No SARs were granted in any of years presented.
The following table sets forth information with respect to stock options and
warrants granted to the Named Executive Officers in fiscal 2004:
OPTION GRANTS IN LAST FISCAL YEAR
Potential
Realized Value at
Number of % of Total Market Assumed Annual
Securities Options Price Rates of Stock Price
Underlying Granted to on Appreciation
Options Employees Exercise Date of for Option Term(1)
Granted in Fiscal Price Grant Expiration -----------------------
Name (#) Year ($/Sh) ($/Sh) Date 5% ($) 10% ($) 0% ($)
---- ---------- ---------- -------- ------- ---------- ------ ------- --------
Andrew B. Kronick(2)...... 365,764 9.5% $0.01 $0.85 2/12/2011 $1,489 $ 3,470 $307,242
Wesley C. Fredenburg(3)... 365,764 9.5% $0.01 $0.85 2/12/2011 1,489 3,470 307,242
Jeffrey Hendrickson(4).... 1,097,294 28.6% $0.01 $0.85 2/12/2011 4,467 10,410 921,727
Robert B. Lewis(5)........ 1,097,294 28.6% $0.01 $0.85 2/12/2011 4,467 10,410 921,727
- --------
(1) Potential realizable value is based on the assumption that the price of the
common stock appreciates at the rates shown, compounded annually, from the
date of grant until the end of the option term. The values are calculated
in accordance with rules promulgated by the Securities and Exchange
Commission and do not reflect the Company's estimate of future stock price
appreciation.
(2) In February 2004, Mr. Kronick was granted warrants to purchase 333,333
shares of common stock. The warrants have an exercise price of $0.01 per
share, a term of seven years and are immediately exercisable after
shareholder approval of the issuance of the warrants. The warrants provide
for additional shares of common stock upon exercise of the warrants in the
event that the Company issues other equity instruments that would result in
dilution to the holders of the warrants. As of July 3, 2004, the warrants
were exercisable into 365,764 shares of common stock.
(3) In February 2004, Mr. Fredenburg was granted warrants to purchase 333,333
shares of common stock. The warrants have an exercise price of $0.01 per
share, a term of seven years and are immediately exercisable after
shareholder approval of the issuance of the warrants. The warrants provide
for additional shares of common stock upon exercise of the warrants in the
event that the Company issues other equity instruments that would result in
dilution to the holders of the warrants. As of July 3, 2004, the warrants
were exercisable into 365,764 shares of common stock.
(4) In February 2004, Mr. Hendrickson was granted warrants to purchase
1,000,000 shares of common stock in connection with his offer of employment
with the Company. The warrants have an exercise price of $0.01 per share, a
term of seven years and are immediately exercisable. The warrants provide
for additional shares of common stock upon exercise of the warrants in the
event that the Company issues other equity instruments that would result in
dilution to the holders of the warrants. As of July 3, 2004, the warrants
were exercisable into 1,097,294 shares of common stock.
(5) In February 2004, Mr. Lewis was granted warrants to purchase 1,000,000
shares of common stock in connection with his offer of employment with the
Company. The warrants have an exercise price of $0.01 per share, a term of
seven years and are immediately exercisable. The warrants provide for
additional shares of common stock upon exercise of the warrants in the
event that the Company issues other equity instruments that would result in
dilution to the holders of the warrants. As of July 3, 2004, the warrants
were exercisable into 1,097,294 shares of common stock.
60
The following table sets forth certain information regarding options and
warrants to purchase shares of the Company's common stock that were held by the
Named Executive Officers in fiscal 2004. No such options or warrants were
exercised during fiscal 2004.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
Number of Shares
Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
July 3, 2004 July 3, 2004
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Vincent A. Wasik.......... 12,500 -- $ -- $ --
Jeffry J. Parell.......... 55,000 -- -- --
Andrew B. Kronick......... 6,666 369,098 -- 175,891
Wesley C. Fredenburg...... 70,000 365,764 -- 175,891
Jeffrey Hendrickson....... 1,097,294 -- 527,674 --
Robert B. Lewis........... 1,097,294 -- 527,674 --
COMPENSATION OF DIRECTORS
Cash Compensation. The Company has not paid any cash compensation to a
director in his or her capacity as a director and has no present plan to pay
directors' fees.
Stock Options and Restricted Stock. In February 1996, the Company adopted
its 1996 Director Stock Option Plan. Until February 2002, each outside director
was granted an option to purchase 3,000 shares of Common Stock for each year of
service as a director. The term of each option granted under the plan was five
years and the exercise price per share for stock granted under the plan was
100% of the fair market value per share on the date on which the respective
option was granted.
Effective February 2002 on an annual basis, each director was granted 4,000
options, and the Chairman of the Board was granted an additional 2,000 options.
Audit and Executive Committee members were granted 2,000 options, Compensation
Committee members were granted 1,000 options, and Executive IT Committee
members were granted 1,500 options. The chairperson of each committee received
an additional 1,000 options. The term of each option granted under the plan was
five years and the exercise price per share for stock granted under the plan
was 100% of the fair market value per share on the date on which the respective
option was granted.
Effective September 2002, directors and committee members were granted, on
an annual basis, shares of restricted stock as compensation for board and
committee service. The shares vested one year from the date of grant of the
restricted stock. Directors were awarded 4,000 shares, and the Chairman of the
Board was granted an additional 2,000 shares. Audit and Executive Committee
members were granted 2,000 shares, Compensation Committee members were granted
1,000 shares, and Executive IT Committee members were granted 1,500 shares. The
chairperson of each committee received an additional 1,000 shares.
Effective May 2004, directors and committee members are granted, on an
annual basis, shares of restricted stock as compensation for board and
committee service. The shares will vest one year from the date of grant of the
restricted stock. The number of shares of restricted stock is to be determined
by dividing the amount of compensation by the closing price of the Company's
common stock on the date of grant according to the following compensation
schedule. Directors are awarded $25,000, and the Chairman of the Board is
granted an additional $12,500. Audit Committee members are granted $25,000.
Executive and Compensation Committee members are granted $15,000, and
Technology Committee members are granted $3,000. The chairperson of each
committee receives an additional $6,000.
61
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND
CHANGE IN CONTROL AGREEMENTS
The Company has employment contracts and severance agreements in effect with
Vincent Wasik, its Chairman and Chief Executive Officer, Jeffry J. Parell, its
former Chief Executive Officer, Wesley C. Fredenburg, its General Counsel and
Secretary, Drew Kronick, its Senior Vice President, Sales, Jeffrey Hendrickson,
its President and Chief Operating Officer and Robert Lewis, its former Chief
Financial Officer.
Mr. Wasik serves as the Company's Chief Executive Officer pursuant to an
agreement effective July 27, 2003 between the Company and MCG Global, LLC
("MCG"). Mr. Wasik is an owner and principal of MCG. The agreement sets forth
the rights and duties of both the Company and Mr. Wasik and directs the
Company's Compensation Committee to establish, on an annual basis, Mr. Wasik's
compensation level and eligibility for salary increases, bonuses, benefits and
grants of equity. The agreement does not contain any fixed term and may be
terminated by either party upon thirty (30) days' notice. The agreement does
not contain any obligation upon the Company to pay severance in the event the
agreement is terminated by the Company.
The Company and Mr. Parell were parties to an employment agreement dated
October 16, 2000, as amended on November 7, 2002, governing his employment with
the Company. The agreement set forth Mr. Parell's compensation level and
eligibility for salary increases, bonuses, benefits and option grants under
stock option plans. Pursuant to the agreement, Mr. Parell's employment was
voluntary and could be terminated by the Company with two months' prior written
notice, and by Mr. Parell with four months' written notice. If the Company were
to terminate Mr. Parell's employment without cause or upon the happening of
other events set forth in his employment agreement, Mr. Parell would receive an
amount equal to his base salary per month at the end of each of the eighteen
months following the date of his termination. The Company could immediately
terminate Mr. Parell's employment for cause upon written notice without any
further obligation to Mr. Parell. The term of the original employment agreement
was for two years, and the term of the amended agreement was also for two
years, at which time, the agreement would automatically renew for a six-month
term, unless either Executive or Company provides the other with written notice
of intention not to renew at least ninety days prior to the expiration of the
initial term, and at least sixty days prior to the expiration of any extension
term. Effective July 28, 2003, Mr. Parell resigned his position with the
Company.
The Company and Mr. Kronick are parties to an employment agreement dated
November 28, 2001, governing his employment with the Company. The agreement
sets forth Mr. Kronick's compensation level and eligibility for salary
increases, bonuses, benefits and option grants under stock option plans and the
terms of a non-solicitation and non-competition agreement. Pursuant to the
agreement, Mr. Kronick's employment is voluntary and may be terminated by the
Company with or without written notice, or by Mr. Kronick with two months'
prior notice. The agreement is not for a fixed period of time. If the agreement
is terminated by the Company for reasons other than cause, the Company will pay
Mr. Kronick an amount equal to his base salary per month at the end of each of
the twelve months following the date of his termination. The Company may
immediately terminate Mr. Kronick's employment for cause upon written notice
without any further obligation to Mr. Kronick.
The Company and Mr. Fredenburg are parties to an employment agreement dated
November 15, 2003, governing his employment with the Company. The agreement
sets forth Mr. Fredenburg's compensation level and eligibility for salary
increases, bonuses, benefits and option grants under stock option plans.
Pursuant to the agreement, Mr. Fredenburg's employment is voluntary and may be
terminated by the Company with or without written notice, or by Mr. Fredenburg
with two months' prior notice. The agreement is for a period of two years and,
at its expiration, can be renewed at the option of the Company. If the
agreement is not renewed, the Company may, at its option and in exchange for
Mr. Fredenburg executing a non-competition agreement, offer to pay an amount
equal to his base salary per month at the end of each of the twelve months
following the date of his termination. The Company may immediately terminate
Mr. Fredenburg's employment for cause upon written notice without any further
obligation to Mr. Fredenburg.
62
The Company and Mr. Hendrickson are parties to an employment agreement dated
December 15, 2003, governing his employment with the Company. The agreement
sets forth Mr. Hendrickson's compensation level and eligibility for salary
increases, bonuses, benefits and option grants under stock option plans.
Pursuant to the agreement, Mr. Hendrickson's employment is voluntary and may be
terminated by the Company with or without written notice, or by Mr. Hendrickson
with two months' prior notice. The agreement is for a period of two years and,
at its expiration, can be renewed at the option of the Company. If the
agreement is not renewed the Company will, in exchange for Mr. Hendrickson
executing a non-competition agreement, offer to pay an amount equal to his base
salary per month at the end of each of the twelve months following the date of
his termination. The Company may immediately terminate Mr. Hendrickson's
employment for cause upon written notice without any further obligation to Mr.
Hendrickson.
The Company and Mr. Lewis were parties to an employment agreement dated
January 12, 2004, governing his employment with the Company. The agreement set
forth Mr. Lewis's compensation level and eligibility for salary increases,
bonuses, benefits and option grants under stock option plans. Pursuant to the
agreement, Mr. Lewis's employment was voluntary and could be terminated by the
Company with or without written notice, or by Mr. Lewis with two months' prior
notice. The agreement was for a period of two years and, at its expiration,
could be renewed at the option of the Company. If the agreement was not renewed
the Company would, in exchange for Mr. Lewis executing a non-competition
agreement, offer to pay an amount equal to his base salary per month at the end
of each of the twelve months following the date of his termination. The Company
could immediately terminate Mr. Lewis's employment for cause upon written
notice without any further obligation to Mr. Lewis. Mr. Lewis left the Company
voluntarily effective July 30, 2004.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 2004, the Compensation Committee of the board consisted of
James G. Brown, and Richard A. Kassar. Neither Mr. Brown nor Mr. Kassar was at
any time during fiscal 2004 or at any other time, an officer or employee of the
Company or any of its subsidiaries. No executive officer of the Company serves
as a member of the board of directors or compensation committee of any entity
that has one or more executive officers serving as a member of the board or the
compensation committee of the Company. Through his position as Managing
Director of TH Lee Putnam Ventures, L.P., James G. Brown had relationships with
the Company requiring disclosure under Item 404 of SEC Regulation S-K. See
"Certain Relationships and Related Party Transactions."
63
COMPENSATION COMMITTEE REPORT
The following is the report of the compensation committee of the board
describing compensation policies and rationales applicable to the Company's
executive officers with respect to the compensation paid to such executive
officers for the fiscal year ended July 3, 2004.
Compensation Philosophy. The philosophy of the Company's compensation
committee regarding executive compensation is to link executive pay to
corporate performance. A significant portion of executive compensation is tied
to the Company's success in meeting one or more specified performance goals and
to appreciation in the Company's market valuation. The goals of the
compensation program are to attract and retain highly talented executives and
to motivate them to high levels of performance, recognizing the different
impact that various executives have on the achievement of corporate goals.
The key elements of the executive compensation are generally base salary,
annual bonus (dependent on corporate and individual performance) and stock
options. The compensation committee approves compensation and pay levels as
well as stock option grants to executive officers.
Base Salaries. Base salaries for executive officers are determined by
evaluating the responsibilities of the position and the experience of the
individual. Base salaries are reviewed annually, and are adjusted based upon
performance contribution, management recommendation and market conditions.
Bonus. Some of the Company's executive officers are eligible for an annual
cash bonus. Individual and corporate performance objectives are established at
the beginning of each year, and eligible executives are assigned target bonus
levels. In fiscal 2004, no executive officers received cash bonus payments. A
number of executive officers did receive, as a bonus and incentive, warrants to
purchase shares of the Company's common stock.
Stock Options. The purpose of the Company's stock option plans is to
provide an additional incentive to certain employees of the Company to work to
maximize stockholder value. Option grants with short-term vesting are used to
reward past performance while option grants with long-term vesting are awarded
to encourage employees to take into account the long-term interests of the
Company, align employees' and shareholders' interests, as well as to create a
valuable retention device for key employees. Stock options are typically
granted at the time of hire, at the time of promotion or at the time of
achievement of a significant corporate objective.
Compensation of Chief Executive Officer. The compensation committee
approved the compensation of Vincent Wasik for fiscal 2004 by way of an
agreement between the Company and MCG Global, LLC. Mr. Wasik is an owner and
principal of MCG Global, LLC. Compensation in fiscal 2004 under the agreement
amounted to $510,000. The compensation committee determined the Chief Executive
Officer's compensation after considering the same factors used to determine the
compensation of other executive officers.
Summary. It is the opinion of the compensation committee that the executive
compensation policies and programs in effect for the Company's executive
officers provide an appropriate level of total remuneration that properly
aligns the Company's performance and interests of the Company's shareholders
with competitive executive compensation in a balanced and reasonable manner.
COMPENSATION COMMITTEE
James G. Brown
Richard A. Kassar
64
Stock Performance Graph
In accordance with Exchange Act regulations, the following performance graph
compares the cumulative total shareholder return on the company's common stock
to the cumulative total return on the NASDAQ Stock Market and a selected group
of peer issuers over the same period. The peer issuers consist of Consolidated
Delivery and Logistics, Inc. and Dynamex. The graph assumes that the value of
the investment in the Company's common stock and each index was $100 in 1999
and that all dividends were reinvested. The information contained in the
performance graphs shall not be deemed to be "soliciting material" or to be
"filed" with the Securities and Exchange Commission, nor shall such information
be incorporated by reference into any future filing under the Securities Act or
the Exchange Act, except to the extent that the Company specifically
incorporates it by reference into such filing.
[CHART]
Velocity S&P
Express SmallCap Peer
Year Corporation 600 Nasdaq Group
--- ----------- -------- ------- -------
1999 $100.00 $100.00 $100.00 $100.00
2000 278.26 115.99 147.97 61.29
2001 20.17 128.89 80.85 47.11
2002 21.22 129.25 54.93 50.60
2003 6.08 124.63 61.21 134.89
2004 3.48 168.54 77.61 295.33
65
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company will be amending the following beneficial ownership tables in
order to reflect recent transactions. As of September 10, 2004, the Company had
issued and outstanding 11,484,628 shares of Common Stock, 2,806,797 shares of
Series B Preferred, 2,000,000 shares of Series C Preferred, 1,517,444 shares of
Series D Preferred, 732,158 shares of Series F Preferred, 5,468,331 shares of
Series G Preferred, 464,397 shares of Series H Preferred, 16,809,987 shares of
Series I Preferred, 7,999,993 shares of Series J Preferred, and 7,266,666
shares of Series K Preferred. The following tables contain certain information
known to the Company regarding beneficial ownership of its outstanding voting
securities as of September 10, 2004, by (i) each person who is known to the
Company to own beneficially more than five percent of each class of the
Company's voting securities, (ii) each of the Company's directors, (iii) each
of the Company's executive officers, and (iv) all executive officers and
directors as a group. Beneficial ownership listed in the tables below based on
ownership of the Company's convertible preferred shares reflects Common Stock
equivalents. Each share of Common Stock is entitled to one vote. For purposes
of voting as of September 10, 2004, each share of Series B Preferred was
convertible into approximately 6.862 shares of Common Stock, each share of
Series C Preferred was convertible into approximately 4.883 shares of Common
Stock, each share of Series D Preferred was convertible into 13.696 shares of
Common Stock, each share of Series F Preferred was convertible into 27.080
shares of Common Stock, each share of Series G Preferred was convertible into
1.126 shares of Common Stock and each share of Series H Preferred was
convertible into 46.253 shares of Common Stock. Holders of the Series B
Preferred, the Series C Preferred, the Series D Preferred, the Series F
Preferred, the Series G Preferred and the Series H Preferred are entitled to
one vote for each share of Common Stock issuable upon conversion of such
preferred stock.
As of September 10, 2004, the conversion of the outstanding Series I
Preferred, Series J Preferred and the Series K Preferred are subject to
shareholder approval, pursuant to Rule 13d-3(d)(1)(i), holders of Series I
Preferred, Series J Preferred and Series K Preferred would not be deemed to be
beneficial owners of the underlying Common Stock.
Unless otherwise noted and subject to applicable community property laws,
each person identified below has sole voting and investment power with respect
to such shares and the address of each person identified below is Velocity
Express Corporation, One Morningside Drive North, Bldg. B, Suite 300, Westport,
Connecticut 06880. Beneficial ownership is determined in accordance with the
rules of the SEC and includes the class of capital stock identified on each
table and securities convertible into or exercisable for the class of capital
stock identified on each table owned by or for, among others, the spouse,
children or certain other relatives of such person as well as other securities
as to which the person has or shares voting or investment power or has the
right to acquire within 60 days of September 10, 2004.
Reference made herein to TH Lee Putnam Ventures ("THLPV") includes TH Lee
Putnam Ventures, L.P., TH Lee Putnam Parallel Ventures, L.P., THLi Co
Investment Partners, LLC, and Blue Star I, LLC.
66
Common Stock
Beneficially Beneficially
Name and Address of Beneficial Owner Owned Owned(1)
------------------------------------ ------------ ------------
TH Lee Putnam Ventures(2)(6)............................. 69,337,213 85.8%
200 Madison Avenue, Suite 2225, New York, NY 10016
James G. Brown(3)........................................ 69,337,213 85.8%
200 Madison Avenue, Suite 2225, New York, NY 10016
Douglas Hsieh(4)......................................... 69,337,213 85.8%
200 Madison Avenue, Suite 2225, New York, NY 10016
Richard and Mabeth Neslund(5)............................ 8,674,879 43.9%
15210 Wayzata Boulevard, Wayzata, MN 55391
HomePoint Liquidating Trust(6)(7)........................ 6,968,610 37.8%
c/o Baruno, Sullivan & Co.
170 Mason Street, Greenwich, CT 06830
Alexander I. Paluch(8)................................... 5,573,782 32.7%
Vincent A. Wasik(9)...................................... 5,447,915 32.8%
East River Ventures II, LP(10)........................... 5,150,476 31.0%
645 Madison Avenue, Ste 2200, New York, NY 10022
IDT Venture Capital, Inc.(11)............................ 3,150,696 21.5%
666 Fifth Avenue, 34th Floor, New York, NY 10103
Jess S. Morgan & Company, Inc.(12)....................... 2,807,013 19.7%
5750 Wilshire Boulevard, Suite 590, Los Angeles, CA 90036
Perkins Capital Management, Inc.(13)..................... 2,019,863 15.0%
730 East Lake Street, Wayzata, MN 55391
Robert McCullough(14).................................... 1,544,010 11.9%
455 Belvedere, Belvedere, CA 94920
BPEF 2 Pegasus Limited(15)............................... 1,468,836 11.3%
33 Riverside Avenue, Fifth Floor, Westport, CT 06880
MCG Global LLC(16)....................................... 1,452,372 11.2%
One Morningside Drive N., Ste 200, Westport, CT 06880
Robert B. Lewis(17)...................................... 1,357,467 10.6%
Jeffrey Hendrickson(17).................................. 1,357,467 10.6%
Woodville LLC(18)........................................ 1,218,792 9.8%
34 Peninsula Road, Dellwood, MN 55110
Sandra Einck(19)......................................... 986,899 7.9%
5674 Shaddlelee Lane W., Fort Meyers, FL 33919
John Kennedy(20)......................................... 812,092 6.6%
2100 First National Center, Oklahoma City, OK 73102
Robert Reynen(21)........................................ 792,362 6.5%
400 Spring Line Drive, Naples, FL 34102
Andrew B. Kronick(22).................................... 508,595 4.2%
Wesley C. Fredenburg(23)................................. 179,562 1.5%
Jeffry J. Parell(24)..................................... 145,412 1.3%
Richard A. Kassar........................................ 14,000 *
Leslie E. Grodd.......................................... 6,000 *
John J. Perkins.......................................... -- 0%
All directors and officers as a group (12 persons)(25)... 82,433,613 88.1%
67
- --------
* Represents less than 1%
(1) Percentage of beneficial ownership is based on 11,484,628 shares of Common
Stock outstanding as of September 10, 2004. Beneficial ownership based upon
ownership of convertible preferred stock reflects Common Stock equivalents
on an as-if-converted basis. Common Stock issuable pursuant to outstanding
warrants, stock options and convertible preferred stock is deemed
outstanding for computing the percentage of the holders thereof, but not
for computing the percentage of any other person. More than one person may
beneficially own the same shares.
(2) Includes: (i) 12,143,659 shares issuable upon conversion of Series B
Preferred owned by TH Lee Putnam Ventures, L.P., 8,961,613 shares issuable
upon conversion of Series B Preferred owned by TH Lee Putnam Parallel
Ventures, L.P., 691,754 shares issuable upon conversion of Series B
Preferred owned by THLi Co Investment Partners, LLC, and 262,740 shares
issuable upon conversion of Series B Preferred owned by Blue Star I, LLC;
(ii) 6,018,802 shares issuable upon conversion of Series C Preferred owned
by TH Lee Putnam Ventures, L.P., 4,441,675 shares issuable upon conversion
of Series C owned by TH Lee Putnam Parallel Ventures, L.P., 341,783 shares
issuable upon conversion of Series C Preferred owned by THLi Co Investment
Partners, LLC, and 131,295 shares issuable upon conversion of Series C
Preferred owned by Blue Star I, LLC; (iii) 2,484,212 shares issuable upon
the exercise and conversion of warrants to purchase Series C Preferred
owned by TH Lee Putnam Ventures, L.P., 1,833,268 shares issuable upon the
exercise and conversion of warrants to purchase Series C Preferred owned by
TH Lee Putnam Parallel Ventures, L.P., 141,065 shares issuable upon the
exercise and conversion of warrants to purchase Series C Preferred owned by
THLi Co Investment Partners, LLC, and 54,193 shares issuable upon the
exercise and conversion of warrants to purchase Series C owned by Blue Star
I, LLC; (iv) 7,478,915 shares issuable upon conversion of Series D
Preferred owned by TH Lee Putnam Ventures, L.P., 5,519,182 shares issuable
upon conversion of Series D Preferred owned by TH Lee Putnam Parallel
Ventures, L.P., 423,866 shares issuable upon conversion of Series D
Preferred owned by THLi Co Investment Partners, LLC, and 163,973 shares
issuable upon conversion of Series D Preferred owned by Blue Star I, LLC;
(v) 1,591,517 shares issuable upon the exercise and conversion of warrants
to purchase Series D Preferred owned by TH Lee Putnam Ventures, L.P.,
1,174,489 shares issuable upon the exercise and conversion of warrants to
purchase Series D Preferred owned by TH Lee Putnam Parallel Ventures, L.P.,
90,205 shares issuable upon the exercise and conversion of warrants to
purchase Series D Preferred owned by THLi Co Investment Partners, LLC, and
34,888 shares issuable upon the exercise of warrants to purchase Series D
Preferred owned by Blue Star I, LLC; (vi) 2,062,330 shares issuable upon
conversion of Series G Preferred owned by TH Lee Putnam Ventures, L.P.,
1,525,422 shares issuable upon conversion of Series G Preferred owned by TH
Lee Putnam Parallel Ventures, L.P., 116,482 shares issuable upon conversion
of Series G Preferred owned by THLi Co Investment Partners, LLC, and 47,829
shares issuable upon conversion of Series G Preferred owned by Blue Star I,
LLC; (vii) 5,032,791 shares issuable upon conversion of Series H Preferred
owned by TH Lee Putnam Ventures, L.P., 3,657,678 shares issuable upon
conversion of Series H Preferred owned by TH Lee Putnam Parallel Ventures,
L.P., 300,093 shares issuable upon conversion of Series H Preferred owned
by THLi Co Investment Partners, LLC, and 116,744 shares issuable upon
conversion of Series H Preferred owned by Blue Star I, LLC; (viii)
1,360,112 shares issuable upon exercise of Common Warrants owned by TH Lee
Putnam Ventures, L.P., 988,488 shares issuable upon exercise of Common
Warrants owned by TH Lee Putnam Parallel Ventures, L.P., 81,100 shares
issuable upon exercise of Common Warrants owned by THLi Co Investment
Partners, LLC, and 31,550 shares issuable upon exercise of Common Warrants
owned by Blue Star I, LLC; (ix) 20,000 shares issuable upon the exercise of
options to purchase Common Stock issued to TH Lee Putnam Fund Advisors,
L.P.; and (x) 13,500 shares of restricted stock issued to TH Lee Putnam
Ventures, L.P. TH Lee Putnam Parallel Ventures, L.P., THLi Co Investment
Partners, LLC and Blue Star I, LLC are affiliates of TH Lee Putnam Ventures.
(3) Consists of shares beneficially owned by THLPV, for which Mr. Brown
disclaims beneficial ownership.
(4) Consists of shares beneficially owned by THLPV, for which Mr. Hsieh
disclaims beneficial ownership.
68
(5) Consists of 377,113 shares owned directly, 692,188 shares issuable pursuant
to warrants, 5,292,905 shares issuable upon conversion of Series F
Preferred and 2,312,673 shares issuable upon conversion of Series H
Preferred.
(6) THLPV is the largest shareholder of HomePoint Corporation. A shareholder of
THLPV is a member of HomePoint Corporation's board of directors.
(7) Consists of 6,846,849 shares issuable upon conversion of Series D Preferred
and 121,761 shares issuable upon exercise of warrants.
(8) Consists of (i) 27,345 shares issuable upon exercise of warrants, 184,605
shares issuable upon conversion of Series F Preferred and 92,506 shares
issuable upon conversion of Series H Preferred owned directly by Mr.
Paluch; (ii) 446,875 shares issuable upon exercise of warrants, 3,200,364
shares issuable upon conversion of Series F Preferred and 1,503,237 shares
issuable upon conversion of Series H Preferred owned by East River Ventures
II, LP; and (iii) 10,313 shares issuable upon exercise of warrants, 73,847
shares issuable upon conversion of Series F Preferred and 34,690 shares
issuable upon conversion of Series H Preferred owned by ERV Partners LLC.
(9) Consists of (i) 105,460 shares owned directly, 396,563 shares issuable upon
exercise of warrants, 1,846,354 shares issuable upon conversion of Series F
Preferred, 1,380,666 shares issuable upon conversion of Series H Preferred,
12,500 shares issuable upon exercise of options, and 9,000 shares of
restricted stock owned directly by Mr. Wasik; (ii) 330,181 shares issuable
upon conversion of Series G Preferred, 883,441 shares issuable upon
conversion of Series H Preferred and 238,750 shares issuable upon exercise
of warrants owned by MCG Global LLC; and (iii) 200,000 shares and 45,000
shares issuable upon exercise of warrants owned by MCG USHP, LLC.
(10) Consists of 446,875 shares issuable upon exercise of warrants, 3,200,364
shares issuable upon conversion of Series F Preferred and 1,503,237 shares
issuable upon conversion of Series H Preferred.
(11) Consists of 73,438 shares issuable upon exercise of warrants and 3,077,258
shares issuable upon conversion of Series F Preferred
(12) Consists of 781,250 shares issuable upon exercise of warrants and
2,025,763 shares issuable upon conversion of Series H Preferred.
(13) Consists of (i) 20,000 shares owned directly, 7,875 shares issuable upon
exercise of warrants, and 541,603 shares issuable upon conversion of
Series F Preferred owned by Pyramid Partners, LP; (ii) 5,157 shares
issuable upon exercise of warrants, 406,202 shares issuable upon
conversion of Series F Preferred and 168,842 shares issuable upon
conversion of Series G Preferred owned by Union Bank & Trust Industricorp
& Co., Inc FBO Twin City Carpenters Pension Plan; (iii) 1,719 shares
issuable upon exercise of warrants and 462,534 shares issuable upon
conversion of Series H Preferred owned by Robert G. Allison; and (iv)
63,906 shares issuable upon exercise of warrants, 110,758 shares issuable
upon conversion of Series F Preferred and 231,267 shares issuable upon
conversion of Series H owned by David M. Westrum. Pyramid Partners, LP,
Union Bank & Trust Industricorp & Co., Inc FBO Twin City Carpenters
Pension Plan, Robert G. Allison, and David M. Westrum are entities
affiliated with Perkins Capital Management, Inc.
(14) Consists of (i) 3,200 shares owned directly, 14,063 shares issuable upon
exercise of warrants and 1,107,796 shares issuable upon conversion of
Series F Preferred; (ii) 2,344 shares issuable upon exercise of warrants
and 184,632 shares issuable upon conversion of Series F Preferred owned by
the Robert F. McCullough, Sr. Family Foundation; (iii) 45,000 shares owned
directly by the McCullough Living Trust; and (iv) 2,344 shares issuable
upon exercise of warrants and 184,632 shares issuable upon conversion of
Series F Preferred owned by the Robert F. McCullough, Sr. IRA.
(15) Consists of 312,500 shares issuable upon exercise of warrants and
1,156,336 shares issuable upon conversion of Series H Preferred.
(16) Consists of 238,750 shares issuable upon exercise of warrants, 330,181
shares issuable upon conversion of Series G Preferred and 883,441 shares
issuable upon conversion of Series H Preferred.
69
(17) Consists of shares issuable upon exercise of warrants.
(18) Consists of 312,500 shares owned directly, 328,125 shares issuable upon
exercise of warrants and 578,167 shares issuable upon conversion of Series
H Preferred.
(19) Consists of 128,125 shares issuable upon exercise of warrants, 246,158
shares issuable upon conversion of Series F Preferred, 150,082 shares
issuable upon conversion of Series G Preferred and 462,534 shares issuable
upon conversion of Series H Preferred.
(20) Consists of 3,125 shares issuable upon exercise of warrants, 246,158
shares issuable upon conversion of Series F Preferred and 562,809 shares
issuable upon conversion of Series G Preferred.
(21) Consists of 68,750 shares issuable upon exercise of warrants, 492,345
shares issuable upon conversion of Series F Preferred and 231,267 shares
issuable upon conversion of Series H Preferred.
(22) Consists of 10,000 shares issuable upon exercise of options, 6,250 shares
issuable upon exercise of warrants and 492,345 shares issuable upon
conversion of Series F Preferred.
(23) Consists of 21,800 shares owned directly, 70,000 shares issuable upon
exercise of options, 11,688 shares issuable upon exercise of warrants,
34,446 shares issuable upon conversion of Series F Preferred and 41,628
shares issuable upon conversion of Series H Preferred.
(24) Consists of 1,500 shares owned directly, 55,000 shares issuable upon
exercise of options, 19,532 shares issuable upon exercise of warrants and
69,380 shares issuable upon conversion of Series H Preferred.
(25) Consists of an aggregate of 127,260 shares of Common Stock, 42,500 shares
of restricted stock, 1,900,892 shares issuable pursuant to presently
exercisable options and warrants, 2,557,750 shares issuable upon
conversion of Series F Preferred and 1,514,800 shares issuable upon
conversion of Series H Preferred directly owned by directors and officers,
69,323,713 shares beneficially owned by THLPV (for which Messrs. Brown and
Hsieh disclaim beneficial ownership) 5,150,476 shares beneficially owned
by East River Ventures II LP (for which Mr. Paluch disclaims beneficial
ownership), 118,850 shares owned by ERV Partners LLC (for which Mr. Paluch
disclaims beneficial ownership), 1,452,372 shares beneficially owned by
MCG Global LLC and 245,000 shares beneficially owned by MCG USHP LLC.
70
Series B Preferred Stock
Amount and
Nature of
Beneficial Percentage
Name and Address of Beneficial Owner Ownership Owned(1)
------------------------------------ ---------- ----------
TH Lee Putnam Ventures(2)...................................... 2,806,797 100.0%
200 Madison Avenue, Suite 2225, New York, NY 10016
James G. Brown(3).............................................. 2,806,797 100.0%
200 Madison Avenue, Suite 2225, New York, NY 10016
Douglas Hsieh(3)............................................... 2,806,797 100.0%
200 Madison Avenue, Suite 2225, New York, NY 10016
Vincent A. Wasik............................................... -- 0%
Alex Paluch.................................................... -- 0%
Richard A. Kassar.............................................. -- 0%
Leslie E. Grodd................................................ -- 0%
John J. Perkins................................................ -- 0%
Wesley C. Fredenburg........................................... -- 0%
Andrew B. Kronick.............................................. -- 0%
Jeffrey Hendrickson............................................ -- 0%
Robert B. Lewis................................................ -- 0%
Jeffry J. Parell............................................... -- 0%
All directors and executive officers as a group (12 persons)(3) 2,806,797 100.0%
- --------
(1) Percentage of beneficial ownership is based on 2,806,797 of Series B
Preferred outstanding as of September 10, 2004, which were convertible into
an aggregate of 22,059,766 shares of Common Stock. See Common Stock
Security Ownership table. More than one person may beneficially own the
same shares.
(2) Includes 1,545,111 shares directly owned by TH Lee Putnam Ventures, L.P.,
1,140,240 shares directly owned by TH Lee Putnam Parallel Ventures, L.P.,
88,016 shares directly owned by THLi Co Investment Partners, LLC, and
33,430 shares directly owned by Blue Star I, LLC.
(3) Consists of shares beneficially owned by TH Lee Putnam Ventures, for which
Messrs. Brown and Hsieh disclaim beneficial ownership.
71
Series C Preferred Stock
Amount and
Nature of
Beneficial Percentage
Name and Address of Beneficial Owner Ownership Owned(1)
------------------------------------ ---------- ----------
TH Lee Putnam Ventures(2)...................................... 2,825,484 100.0%
200 Madison Avenue, Suite 2225, New York, NY 10016
James G. Brown(3).............................................. 2,825,484 100.0%
200 Madison Avenue, Suite 2225, New York, NY 10016
Douglas Hsieh(3)............................................... 2,825,484 100.0%
200 Madison Avenue, Suite 2225, New York, NY 10016
Vincent A. Wasik............................................... -- 0%
Alex Paluch.................................................... -- 0%
Richard A. Kassar.............................................. -- 0%
Leslie E. Grodd................................................ -- 0%
John J. Perkins................................................ -- 0%
Wesley C. Fredenburg........................................... -- 0%
Andrew B. Kronick.............................................. -- 0%
Jeffrey Hendrickson............................................ -- 0%
Robert B. Lewis................................................ -- 0%
Jeffry J. Parell............................................... -- 0%
All directors and executive officers as a group (12 persons)(3) 2,825,484 100.0%
- --------
(1) Percentage of beneficial ownership is based on 2,000,000 of Series C
Preferred outstanding as of September 10, 2004, which were convertible into
an aggregate of 10,933,555 shares of Common Stock. See Common Stock
Security Ownership table. More than one person may beneficially own the
same shares.
(2) Includes 1,100,978 shares owned directly and 454,420 shares issuable upon
exercise of warrants owned by TH Lee Putnam Ventures, L.P., 812,485 shares
owned directly and 335,347 shares issuable upon exercise of warrants owned
by TH Lee Putnam Parallel Ventures, L.P., 62,520 shares owned directly and
25,804 shares issuable upon exercise of warrants owned by THLi Co
Investment Partners, LLC and 24,017 shares owned directly and 9,913 shares
issuable upon exercise of warrants owned by Blue Star I, LLC.
(3) Consists of shares beneficially owned by TH Lee Putnam Ventures, L.P., for
which Messrs. Brown and Hsieh disclaim beneficial ownership.
72
Series D Preferred Stock
Amount and
Nature of
Beneficial Percentage
Name and Address of Beneficial Owner Ownership Owned(1)
------------------------------------ ---------- ----------
TH Lee Putnam Ventures(2)...................................... 1,234,071 71.2%
200 Madison Avenue, Suite 2225, New York, NY 10016
James G. Brown(3).............................................. 1,234,071 71.2%
200 Madison Avenue, Suite 2225, New York, NY 10016
Douglas Hsieh(3)............................................... 1,234,071 71.2%
200 Madison Avenue, Suite 2225, New York, NY 10016
HomePoint Liquidating Trust(4)................................. 499,906 32.9%
c/o Baruno, Sullivan & Co.
170 Mason Street, Greenwich, CT 06830
Vincent A. Wasik............................................... -- 0%
Alex Paluch.................................................... -- 0%
Richard A. Kassar.............................................. -- 0%
Leslie E. Grodd................................................ -- 0%
John J. Perkins................................................ -- 0%
Wesley C. Fredenburg........................................... -- 0%
Andrew B. Kronick.............................................. -- 0%
Jeffrey Hendrickson............................................ -- 0%
Robert B. Lewis................................................ -- 0%
Jeffry J. Parell............................................... -- 0%
All directors and executive officers as a group (12 persons)(5) 1,234,071 71.2%
- --------
(1) Percentage of beneficial ownership is based on 1,517,444 shares of Series D
Preferred outstanding as of September 10, 2004, which were convertible into
an aggregate of 20,783,338 shares of Common Stock. See Common Stock
Security Ownership table. More than one person may beneficially own the
same shares.
(2) Includes 560,144 shares owned directly and 119,199 shares issuable upon
exercise of warrants owned by TH Lee Putnam Ventures, L.P., 413,367 shares
owned directly and 87,965 shares issuable upon exercise of warrants owned
by TH Lee Putnam Parallel Ventures, L.P., 31,746 shares owned directly and
6,756 shares issuable upon exercise of warrants owned by THLi Co Investment
Partners, LLC and 12,281 shares owned directly and 2,613 shares issuable
upon exercise of warrants owned by Blue Star I, LLC.
(3) Consists of shares beneficially owned by the TH Lee Putnam Ventures, for
which Messrs. Brown and Hsieh disclaim beneficial ownership.
(4) A shareholder of THLPV is a member of HomePoint Corporation's board of
directors.
(5) Consists of shares beneficially owned by TH Lee Putnam Ventures, L.P., for
which Messrs. Brown and Hsieh disclaim beneficial ownership.
73
Series F Preferred Stock
Amount and
Nature of
Beneficial Percentage
Name and Address of Beneficial Owner Ownership Owned(1)
------------------------------------ ---------- ----------
Richard Neslund................................................ 195,453 26.7%
15210 Wayzata Boulevard, Wayzata, MN 55391
Alex Paluch(2)................................................. 127,725 17.4%
East River Ventures II, LP..................................... 118,181 16.1%
645 Madison Avenue, Ste 2200, New York, NY 10022
IDT Venture Capital, Inc....................................... 113,635 15.5%
c/o Neuberger Berman
605 Third Avenue, 36th Floor, New York, NY 10158
Vincent A. Wasik............................................... 68,181 9.3%
Robert McCullough(3)........................................... 54,544 7.4%
455 Belvedere, Belvedere, CA 94920
Perkins Capital Management(4).................................. 39,090 5.3%
730 East Lake Street, Wayzata, MN 55391
Andrew B. Kronick.............................................. 18,181 2.5%
Wesley C. Fredenburg........................................... 1,272 *
James G. Brown................................................. -- 0%
Douglas Hsieh.................................................. -- 0%
Richard A. Kassar.............................................. -- 0%
Leslie E. Grodd................................................ -- 0%
John J. Perkins................................................ -- 0%
Jeffrey Hendrickson............................................ -- 0%
Robert B. Lewis................................................ -- 0%
Jeffry J. Parell............................................... -- 0%
All directors and executive officers as a group (12 persons)(5) 215,359 29.4%
- --------
* Represents less than 1%
(1) Percentage of beneficial ownership is based on 732,158 shares of Series F
Preferred outstanding as of September 10, 2004, which were convertible into
an aggregate of 19,826,958 shares of Common Stock. See Common Stock
Security Ownership table. More than one person may beneficially own the
same shares.
(2) Consists of 6,817 shares owned directly, 118,181 shares owned by East River
Ventures II, LP, and 2,727 shares owned by ERV Partners, LLC. Mr. Paluch is
a General Partner of East River Ventures II, LP and a Managing Member of
ERV Partners, LLC. Mr. Paluch disclaims beneficial ownership of the shares
held of record by each of East River Ventures II, LP and ERV Partners, LLC.
(3) Consists of 40,908 shares owned directly, 6,818 shares owned directly by
the Robert F. McCullough Sr. Family Foundation, and 6,818 shares owned
directly by the Robert F. McCullough Sr. IRA.
(4) Consists of (i) 20,000 shares owned by Pyramid Partners, LP; (ii) 15,000
shares owned by Union Bank & Trust Industricorp & Co., Inc FBO Twin City
Carpenters Pension Plan; and (iii) 4,090 shares owned by David M. Westrum.
Pyramid Partners, LP, Union Bank & Trust Industricorp & Co., Inc FBO Twin
City Carpenters Pension Plan and David M. Westrum are entities affiliated
with Perkins Capital Management, Inc.
(5) Consists of (i) 94,451 shares owned directly by officers and directors;
(ii) 118,181 shares owned by East River Ventures II, LP; and (iii) 2,727
shares owned by ERV Partners LLC for which Mr. Paluch disclaims beneficial
ownership.
74
Series G Preferred Stock
Amount and
Nature of
Beneficial Percentage
Name and Address of Beneficial Owner Ownership Owned(1)
------------------------------------ ---------- ----------
TH Lee Putnam Ventures(2)...................................... 3,333,333 61.0%
200 Madison Avenue, Suite 2225, New York, NY 10016
James G. Brown(3).............................................. 3,333,333 61.0%
200 Madison Avenue, Suite 2225, New York, NY 10016
Douglas Hsieh(3)............................................... 3,333,333 61.0%
200 Madison Avenue, Suite 2225, New York, NY 10016
John Kennedy................................................... 500,000 9.1%
2100 First National Center, Oklahoma City, OK 73102
Mike Samis..................................................... 500,000 9.1%
2100 First National Center, Oklahoma City, OK 73102
MCG Global LLC................................................. 293,333 5.4%
One Morningside Drive N., Ste 200, Westport, CT 06880
Vincent A. Wasik(4)............................................ 293,333 5.4%
Alex Paluch.................................................... -- 0%
Richard A. Kassar.............................................. -- 0%
Leslie E. Grodd................................................ -- 0%
John J. Perkins................................................ -- 0%
Wesley C. Fredenburg........................................... -- 0%
Andrew B. Kronick.............................................. -- 0%
Jeffrey Hendrickson............................................ -- 0%
Robert B. Lewis................................................ -- 0%
Jeffry J. Parell............................................... -- 0%
All directors and executive officers as a group (12 persons)(5) 3,626,666 66.3%
- --------
(1) Percentage of beneficial ownership is based on 5,468,331 shares of Series G
Preferred outstanding as of September 10, 2004, which were convertible into
an aggregate of 6,155,251 shares of Common Stock. See Common Stock Security
Ownership table. More than one person may beneficially own the same shares.
(2) Includes 1,832,167 shares directly owned by TH Lee Putnam Ventures, L.P.,
1,355,183 shares directly owned by TH Lee Putnam Parallel Ventures, L.P.,
103,488 shares directly owned by THLi Co Investment Partners, LLC, and
42,495 shares directly owned by Blue Star I, LLC.
(3) Consists of shares beneficially owned by TH Lee Putnam Ventures, for which
Messrs. Brown and Hsieh disclaim beneficial ownership.
(4) Consists of 293,333 shares owned directly by MCG Global, LLC. Mr. Wasik is
the founder and a principal of MCG Global, LLC.
(5) Consists of (i) 3,333,333 shares owned by THLPV, for which Messrs. Brown
and Hsieh disclaim beneficial ownership; and (ii) 293,333 shares owned by
MCG Global, LLC.
75
Series H Preferred Stock
Amount and
Nature of
Beneficial Percentage
Name and Address of Beneficial Owner Ownership Owned(1)
------------------------------------ ---------- ----------
TH Lee Putnam Ventures(2)...................................... 196,900 42.4%
200 Madison Avenue, Suite 2225, New York, NY 10016
James G. Brown(3).............................................. 196,900 42.4%
200 Madison Avenue, Suite 2225, New York, NY 10016
Douglas Hsieh(3)............................................... 196,900 42.4%
200 Madison Avenue, Suite 2225, New York, NY 10016
Richard Neslund................................................ 50,000 10.8%
15210 Wayzata Boulevard, Wayzata, MN 55391
Vincent A. Wasik(4)............................................ 48,950 10.5%
Jess S. Morgan & Company, Inc.................................. 43,797 9.4%
5750 Wilshire Boulevard, Suite 590, Los Angeles, CA 90036
Alex Paluch(5)................................................. 35,250 7.6%
East River Ventures II, LP..................................... 32,500 7.0%
645 Madison Avenue, Ste 2200, New York, NY 10022
BPEF 2 Pegasus Limited......................................... 25,000 5.4%
33 Riverside Avenue, Fifth Floor, Westport, CT 06880
Jeffry J. Parell............................................... 1,500 *
Wesley C. Fredenburg........................................... 900 *
Richard A. Kassar.............................................. -- 0%
Leslie E. Grodd................................................ -- 0%
John J. Perkins................................................ -- 0%
Andrew B. Kronick.............................................. -- 0%
Jeffrey Hendrickson............................................ -- 0%
Robert B. Lewis................................................ -- 0%
All directors and executive officers as a group (12 persons)(6) 282,000 60.7%
- --------
* Represents less than 1%
(1) Percentage of beneficial ownership is based on 464,397 shares of Series H
Preferred outstanding as of September 10, 2004, which were convertible into
an aggregate of 21,479,957 shares of Common Stock. See Common Stock
Security Ownership table. More than one person may beneficially own the
same shares.
(2) Includes 108,809 shares directly owned by TH Lee Putnam Ventures, L.P.,
79,079 shares directly owned by TH Lee Putnam Parallel Ventures, L.P.,
6,488 shares directly owned by THLi Co Investment Partners, LLC, and 2,524
shares directly owned by Blue Star I, LLC.
(3) Consists of shares beneficially owned by TH Lee Putnam Ventures, for which
Messrs. Brown and Hsieh disclaim beneficial ownership.
(4) Consists of 29,850 shares owned directly and 19,100 shares owned by MCG
Global, LLC.
(5) Consists of 2,000 shares owned directly, 32,500 shares owned by East River
Ventures II, LP, and 750 shares owned by ERV Partners, LLC.
(6) Consists of (i) 32,750 shares owned directly by officers and directors;
(ii) 196,900 shares owned by THLPV, for which Messrs. Brown and Hsieh
disclaim beneficial ownership; (iii) 19,100 shares owned by MCG Global,
LLC; (iv) 32,500 shares owned by East River Ventures II, LP; and (v) 750
shares owned by ERV Partners, LLC.
76
Series I Preferred Stock
Amount and
Nature of
Beneficial Percentage
Name and Address of Beneficial Owner Ownership Owned(1)
------------------------------------ ---------- ----------
TH Lee Putnam Ventures(2)...................................... 12,643,332 75.2%
200 Madison Avenue, Suite 2225, New York, NY 10016
James G. Brown(3).............................................. 12,643,332 75.2%
200 Madison Avenue, Suite 2225, New York, NY 10016
Douglas Hsieh(3)............................................... 12,643,332 75.2%
200 Madison Avenue, Suite 2225, New York, NY 10016
Andrew K. Boszhardt, Jr........................................ 1,000,000 5.9%
666 Fifth Avenue, 34th Floor, New York, NY 10103
Richard Neslund................................................ 833,333 5.0%
15210 Wayzata Boulevard, Wayzata, MN 55391
Vincent A. Wasik(4)............................................ 400,000 2.4%
Alex Paluch(5)................................................. 273,333 1.6%
Richard A. Kassar.............................................. -- 0%
Leslie E. Grodd................................................ -- 0%
John J. Perkins................................................ -- 0%
Wesley C. Fredenburg........................................... -- 0%
Andrew B. Kronick.............................................. -- 0%
Jeffrey Hendrickson............................................ -- 0%
Robert B. Lewis................................................ -- 0%
Jeffry J. Parell............................................... -- 0%
All directors and executive officers as a group (12 persons)(6) 13,316,665 79.2%
- --------
(1) Percentage of beneficial ownership is based on 16,809,987 shares of Series
I Preferred outstanding as of September 10, 2004, which were convertible
into an aggregate of 228,190,027 shares of Common Stock. Since the
conversion of the Series I Preferred is subject to shareholder approval,
pursuant to Rule 13d-3(d)(1)(i), holders of Series I Preferred would not be
deemed to be beneficial owners of the underlying Common Stock. More than
one person may beneficially own the same shares.
(2) Includes 6,962,290 shares directly owned by TH Lee Putnam Ventures, L.P.,
5,084,301 shares directly owned by TH Lee Putnam Parallel Ventures, L.P.,
430,263 shares directly owned by THLi Co Investment Partners, LLC, and
166,478 shares directly owned by Blue Star I, LLC.
(3) Consists of shares beneficially owned by TH Lee Putnam Ventures, for which
Messrs. Brown and Hsieh disclaim beneficial ownership
(4) Consists of 400,000 shares owned by MCG Global, LLC.
(5) Consists of 40,000 shares owned directly and 233,333 shares owned by East
River Ventures II, LP.
(6) Consists of (i) 40,000 shares owned directly by officers and directors;
(ii) 12,643,332 shares owned by THLPV, for which Messrs. Brown and Hsieh
disclaim beneficial ownership; (iii) 400,000 shares owned by MCG Global,
LLC; and (iv) 233,333 shares owned by East River Ventures II, LP.
77
Series J Preferred Stock
Amount and
Nature of
Beneficial Percentage
Name and Address of Beneficial Owner Ownership Owned(1)
------------------------------------ ---------- ----------
TH Lee Putnam Ventures(2)...................................... 6,333,534 79.2%
200 Madison Avenue, Suite 2225, New York, NY 10016
James G. Brown(3).............................................. 6,333,534 79.2%
200 Madison Avenue, Suite 2225, New York, NY 10016
Douglas Hsieh(3)............................................... 6,333,534 79.2%
200 Madison Avenue, Suite 2225, New York, NY 10016
East River Ventures II, LP..................................... 416,666 5.2%
645 Madison Avenue, Ste 2200, New York, NY 10022
Alex Paluch(4)................................................. 416,666 5.2%
Robert B. Lewis................................................ 266,666 3.3%
Vincent A. Wasik(5)............................................ 183,332 2.3%
Jeffrey Hendrickson............................................ 66,666 *
Wesley C. Fredenburg........................................... 16,666 *
Richard A. Kassar.............................................. -- 0%
Leslie E. Grodd................................................ -- 0%
John J. Perkins................................................ -- 0%
Andrew B. Kronick.............................................. -- 0%
Jeffry J. Parell............................................... -- 0%
All directors and executive officers as a group (12 persons)(6) 7,016,864 87.7%
- --------
* Represents less than 1%
(1) Percentage of beneficial ownership is based on 7,999,993 shares of Series J
Preferred outstanding as of September 10, 2004, which were convertible into
an aggregate of 89,285,616 shares of Common Stock. Since the conversion of
the Series J Preferred is subject to shareholder approval, pursuant to Rule
13d-3(d)(1)(i), holders of Series J Preferred would not be deemed to be
beneficial owners of the underlying Common Stock. More than one person may
beneficially own the same shares.
(2) Includes 3,484,981 shares directly owned by TH Lee Putnam Ventures, L.P.,
2,549,339 shares directly owned by TH Lee Putnam Parallel Ventures, L.P.,
215,740 shares directly owned by THLi Co Investment Partners, LLC, and
83,474 shares directly owned by Blue Star I, LLC.
(3) Consists of shares beneficially owned by TH Lee Putnam Ventures, for which
Messrs. Brown and Hsieh disclaim beneficial ownership.
(4) Consists of 416,666 shares owned by East River Ventures II, LP.
(5) Consists of 116,666 shares owned directly and 66,666 shares owned by MCG
Global, LLC.
(6) Consists of (i) 199,998 shares owned directly by officers and directors;
(ii) 6,333,534 shares owned by THLPV, for which Messrs. Brown and Hsieh
disclaim beneficial ownership; (iii) 66,666 shares owned by MCG Global,
LLC; and (iv) 416,666 shares owned by East River Ventures II, LP.
78
Series K Preferred Stock
Amount and
Nature of
Beneficial Percentage
Name and Address of Beneficial Owner Ownership Owned(1)
------------------------------------ ---------- ----------
TH Lee Putnam Ventures(2)...................................... 7,266,666 100.0%
200 Madison Avenue, Suite 2225, New York, NY 10016
James G. Brown(3).............................................. 7,266,666 100.0%
200 Madison Avenue, Suite 2225, New York, NY 10016
Douglas Hsieh(3)............................................... 7,266,666 100.0%
200 Madison Avenue, Suite 2225, New York, NY 10016
Vincent A. Wasik............................................... -- 0%
Alex Paluch.................................................... -- 0%
Richard A. Kassar.............................................. -- 0%
Leslie E. Grodd................................................ -- 0%
John J. Perkins................................................ -- 0%
Wesley C. Fredenburg........................................... -- 0%
Andrew B. Kronick.............................................. -- 0%
Jeffrey Hendrickson............................................ -- 0%
Robert B. Lewis................................................ -- 0%
Jeffry J. Parell............................................... -- 0%
All directors and executive officers as a group (12 persons)(3) 7,266,666 100.0%
- --------
(1) Percentage of beneficial ownership is based on 7,266,666 shares of Series K
Preferred outstanding as of September 10, 2004, which were convertible into
an aggregate of 72,666,660 shares of Common Stock. Since the conversion of
the Series K Preferred is subject to shareholder approval, pursuant to Rule
13d-3(d)(1)(i), holders of Series K Preferred would not be deemed to be
beneficial owners of the underlying Common Stock. More than one person may
beneficially own the same shares.
(2) Includes 3,998,430 shares directly owned by TH Lee Putnam Ventures, L.P.,
2,924,937 shares directly owned by TH Lee Putnam Parallel Ventures, L.P.,
247,526 shares directly owned by THLi Co Investment Partners, LLC, and
95,773 shares directly owned by Blue Star I, LLC.
(3) Consists of shares beneficially owned by TH Lee Putnam Ventures, for which
Messrs. Brown and Hsieh disclaim beneficial ownership.
79
Equity Compensation Plan Information
The Company maintains the 1995 Stock Option Plan (the "1995 Plan"), the 2000
Stock Option Plan (the "2000 Plan") and the 1996 Director Stock Option Plan
(the "1996 Director Plan"), pursuant to which it may grant equity awards to
eligible persons. The shareholders of the Company have approved the 1995 Plan,
the 2000 Plan and the 1996 Director Plan.
The following table sets for information about the Company's equity
compensation plans as of July 3, 2004. For more information about the Company's
stock option plans, see Note 8 to the Consolidated Financial Statements.
Number of securities to Weighted average
be issued upon exercise exercise price of Number of securities
of outstanding options, outstanding options, remaining available
warrants and rights warrants and rights for future issuance
----------------------- -------------------- --------------------
Equity compensation plans approved by security
holders..................................... 7,455,952(1) $1.88 1,497,252(2)
Equity compensation plans not approved by
security holders(3)......................... 4,457,947 1.28 NA
---------- ----- ---------
Total......................................... 11,913,899 $1.66 1,497,252
========== ===== =========
- --------
(1) 175,402 to be issued under the 1995 Plan; 788,611 to be issued under the
2000 Plan; and 9,000 to be issued under the 1996 Director Plan.
(2) 68,004 remaining under the 1995 Plan; 1,321,248 remaining under the 2000
Plan; and 108,000 remaining under the 1996 Director Plan.
(3) Includes (i) 95,000 non qualified stock options that were issued in October
and November 2000 to certain executive officers in connection with their
offers of employment with the Company and vest ratably over three years;
(ii) 20,000 non-qualified stock options issued in October 2001 to certain
executive officers and vest ratably over two years on each six-month
anniversary of the date of grant; (iii) 15,000 non qualified stock options
issued to a consultant in exchange for services provided in 1999 which
option vested on the date of grant; (iv) 4,327,947 shares of common stock
issuable upon exercise of warrants. The warrants were granted to employees
and outside contractors for the purpose of compensation and bonuses and
have various grant dates, expiration dates and exercise prices. Certain of
the warrants contain a provision to allow additional shares of common stock
upon exercise of the warrants in the event that the Company issues other
equity instruments that would result in dilution to the holders of the
warrants.
80
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Others
Issuance of Series J Convertible Preferred Stock
Pursuant to Stock Purchase Agreements entered into during March, April and
July 2004, the Company issued 7,999,993 shares of Series J Convertible
Preferred Stock ("Series J Preferred") for $1.50 per share for net proceeds of
$12.0 million. Of the total proceeds, $11.9 million was received in cash, and
$100,000 was in exchange for services performed for the Company. The initial
conversion price of the Series J Preferred was $0.15, and, at the time of
issuance, each share of Series J Preferred was convertible, upon shareholder
approval, into ten shares of the Company's common stock.
The Company sold the Series J Preferred to the following directors, officers
and/or beneficial owners of 5% or more of any class of voting securities: TH
Lee Putnam Ventures holds more than 5% of each of Common Stock, Series B
Preferred, Series C Preferred, Series D Preferred, Series G Preferred and
Series H Preferred. Two of its executive officers are also serving on the
Company's Board. Mr. Alex Paluch is a member of the Board and also owns more
than 5% of the Common Stock, Series F Preferred and Series H Preferred. East
River Ventures II LP owns more than 5% of Common Stock, Series F Preferred and
Series H Preferred. Robert B. Lewis is the Company's former Chief Financial
Officer and owns more than 5% of the Common Stock. Vincent Wasik, the founder
and principal of MCG Global LLC and the Chairman of the Board and CEO, owns
more than 5% of Common Stock, Series F Preferred, Series G Preferred and Series
H Preferred. Woodville LLC owns more than 5% of Common Stock. Robert Reynen
owns more than 5% of the Common Stock. BPEF 2 Pegasus Limited owns more than 5%
of the Common Stock and the Series H Preferred. MCG Global LLC beneficially
owns more than 5% of Common Stock and the Series G Preferred. Jeffrey
Hendrickson is the President and COO and owns more than 5% of the Common Stock.
Mr. Fredenburg is the Company's General Counsel and Secretary.
Number of Shares of
Name of Beneficial Owner Series J Preferred
------------------------ -------------------
TH Lee Putnam Ventures(1) 6,333,534
Alex Paluch(2)........... 416,666
East River Ventures II LP 416,666
Robert B. Lewis.......... 266,666
Vincent Wasik(3)......... 183,332
Woodville LLC............ 133,333
Robert Reynen............ 100,000
BPEF 2 Pegasus Limited... 80,000
MCG Global LLC........... 66,666
Jeffrey Hendrickson...... 66,666
Wesley C. Fredenburg..... 16,666
- --------
(1) Two of the Company's directors, Messrs. James G. Brown and Douglas Hsieh,
are executive officers of TH Lee Putnam Ventures. Both Messrs. Brown and
Hsieh disclaim beneficial ownership of these shares.
(2) Represents shares owned by East River Ventures II LP for which Mr. Paluch
disclaims beneficial ownership. Mr. Paluch is a managing partner in East
River Ventures II LP.
(3) Consists of 116,666 shares owned directly and 66,666 shares owned by MCG
Global, LLC. Mr. Wasik is the founder and a principal of MCG Global, LLC.
Issuance of Series I Convertible Preferred Stock
Pursuant to Stock Purchase Agreements entered into during October, November
and December 2003, the Company issued 16,809,987 shares of Series I Convertible
Preferred Stock ("Series I Preferred") for $1.50 per share for net proceeds of
$24.4 million. Of the total proceeds, $23.7 million was received in cash, and
$1.5 was
81
in exchange for services performed for the Company. The initial conversion
price of the Series I Preferred was $0.15, and, at the time of issuance, each
share of Series I Preferred was convertible, upon shareholder approval, into
ten shares of the Company's common stock.
The Company sold the Series I Preferred to the following directors, officers
and/or beneficial owners of 5% or more of any class of voting securities: TH
Lee Putnam Ventures holds more than 5% of each of Common Stock, Series B
Preferred, Series C Preferred, Series D Preferred, Series G Preferred and
Series H Preferred. Two of its executive officers are also serving on the
Company's Board. Richard Neslund owns more than 5% of the Common Stock, the
Series F Preferred and the Series H Preferred. MCG Global LLC beneficially owns
more than 5% of Common Stock and the Series G Preferred and Vincent Wasik, the
founder and principal of MCG Global LLC and the Chairman of the Board and CEO
owns more than 5% of Common Stock, Series F Preferred, Series G Preferred and
Series H Preferred. Mr. Alex Paluch is a member of the Board and also owns more
than 5% of the Common Stock, Series F Preferred and Series H Preferred. East
River Ventures II LP owns more than 5% of Common Stock, Series F Preferred and
Series H Preferred. Woodville LLC owns more than 5% of Common Stock. BPEF 2
Pegasus Limited owns more than 5% of the Common Stock and the Series H
Preferred. Robert Reynen owns more than 5% of the Common Stock.
Number of Shares of
Name of Beneficial Owner Series I Preferred
------------------------ -------------------
TH Lee Putnam Ventures(1) 12,643,332
Richard Neslund.......... 833,333
MCG Global LLC........... 400,000
Vincent Wasik(2)......... 400,000
Alex Paluch(3)........... 273,333
East River Ventures II LP 233,333
Woodville LLC............ 233,333
BPEF 2 Pegasus Limited... 166,666
Robert Reynen............ 68,666
- --------
(1) Two of the Company's directors, Messrs. James G. Brown and Douglas Hsieh,
are executive officers of TH Lee Putnam Ventures. Both Messrs. Brown and
Hsieh disclaim beneficial ownership of these shares.
(2) Includes 400,000 shares owned directly by MCG Global, LLC. Mr. Wasik is the
founder and a principal of MCG Global, LLC.
(3) Includes 40,000 shares owed by Mr. Paluch and 233,333 shares owned by East
River Ventures II LP for which Mr. Paluch disclaims beneficial ownership.
Mr. Paluch is a managing partner in East River Ventures II LP.
Contracts and arrangements with Related Parties
The Company has entered into Contractor Services Agreement (the "agreement")
with MCG Global, LLC and its related entities ("MCG"), effective as of July 27,
2003 under which Vincent A. Wasik provides all services as Chief Executive
Officer of the Company. Vincent A. Wasik was a shareholder and Chairman of the
Board of the Company at the time the agreement was entered into. The agreement
provides that the Compensation Committee on an annual basis shall establish the
compensation for these services. In fiscal 2004, the Company recorded
compensation expense of $510,000 for these services.
The Company subleases a portion of its headquarters office space in Westport
Connecticut from MCG. The sublease agreement was approved by the Company's
Audit Committee who determined that the terms of the sublease were at market
rates. The Company also reimburses MCG for limited use of MCG's personnel and
for office expenses.
The Company has a business relationship with Peritas, LLC ("Peritas"), a
vehicle rental company wholly owned by TH Lee Putnam Ventures ("THLPV").
Peritas was initially formed and owned by MCG Global, LLC.
82
The founder and principal of MCG Global LLC is Vincent Wasik, the Chairman of
the Board and CEO of the Company. MCG established Peritas to accommodate the
Company's need for the Peritas services pending a new owner. Neither MCG nor
Mr. Wasik has received any revenue, compensation or benefit from short term
ownership or management of Peritas and Peritas was transferred to THLPV for no
compensation or consideration. The business of Peritas is to rent delivery
vehicles to independent contractors who perform services for the Company and
other companies. On May 24, 2005, the Company and Peritas entered into an
Agency Agreement whereby the Company acts as an agent for Peritas for the
purposes of vehicle rentals. The term of the agreement is for twelve months.
The services performed by the Company under the Agency Agreement include,
renting the vehicles to independent contractors, maintenance of the vehicles
and collecting the rental fees and delivering the fees to Peritas. Under the
Agency Agreement, the Company receives a 10% commission of all rental revenues
and a reimbursement of any vehicle related expenses. To date, the Company has
collected rental revenues and received commissions. The Company's Audit
Committee approved the business relationship between the Company and Peritas.
THLPV provides the Company with a standby Letter of Credit guarantee of $7.5
million in support of the Company's revolving credit facility.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth the approximate aggregate fees billed to the
Company for fiscal years 2004 and 2003 by Ernst & Young LLP, the Company's
principal accountant:
Fiscal Year
-----------------
Fee 2004 2003
--- -------- --------
Audit Fees(1)..... $695,000 $530,000
Audit Related Fees 0 0
Tax Fees.......... 0 0
All Other Fees.... 0 0
- --------
(1) Includes fees related to the annual audit and quarterly reviews.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit
Services Provided by the Company's Independent Auditors
The Audit Committee is responsible for appointing, setting compensation for
and overseeing the work of the independent auditors. The Audit Committee has
established a policy for pre-approving the services provided by the Company's
independent auditors in accordance with the auditor independence rules of the
Securities and Exchange Commission. This policy requires the review and
pre-approval by the Audit Committee of all audit and permissible non-audit
services provided by the independent auditors and an annual review of the
financial plan for audit fees.
To ensure that auditor independence is maintained, the Audit Committee
annually pre-approves the audit services to be provided by the independent
auditors and the related estimated fees for such services, as well as the
nature and extent of specific types of audit-related, tax and other non-audit
services to be provided by the independent auditors during the year.
As the need arises, other specific permitted services are pre-approved on a
case-by-case basis during the year. A request for pre-approval of services on a
case-by-case basis must be submitted by the Company's Chief Financial Officer,
providing information as to the nature of the particular service to be
provided, estimated related fees and management's assessment of the impact of
the service on the auditor's independence. The Audit Committee will not
delegate to management the pre-approval of services to be performed by the
independent auditors.
All of the services provided by the independent auditors in fiscal 2004,
including services related to the Audit-Related Fees, Tax Fees and All Other
Fees described above, were approved by the Audit Committee under its
pre-approval policies.
83
PART IV.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(1) Financial Statements
The consolidated financial statements required by this item are listed
in Item 8, "Financial Statements and Supplementary Data" herein.
(2) Financial Statement Schedules
II--Valuation and Qualifying Accounts--years ended June 28, 2003, June
29, 2002 and June 30, 2001.
All other schedules for which provision is made in the applicable
regulations of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have
been omitted.
(3) Exhibits
Reference is made to the Exhibit Index.
(4) Reports on Form 8-K.
The Company filed one report on Form 8-K during the fiscal quarter ended
June 28, 2003, as follows:
(i) Current Report on Form 8-K filed on May 14, 2003, relating to the
issuance of a press release of Velocity Express Corporation reporting
Velocity Express Corporation's financial results for the quarter
ended March 29, 2003.
84
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the city of Westport, state of
Connecticut on December 21, 2004.
VELOCITY EXPRESS CORPORATION
By /s/ VINCENT A. WASIK
-----------------------------
Vincent A. Wasik
Chairman of the Board
President, Chief Executive
Officer &
Interim Chief Financial
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Wesley C. Fredenburg his attorney-in-fact, with
the power of substitution, for him in any and all capacities, to sign any
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorney-in-fact, or substitute or substitutes may do or cause to be done by
virtue hereof.
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ VINCENT A. WASIK Chairman of the Board December 21, 2004
- ----------------------------- President and Chief
Vincent A. Wasik Executive Officer
/s/ JAMES BROWN Director December 21, 2004
- -----------------------------
James Brown
/s/ DOUGLAS HSIEH Director December 21, 2004
- -----------------------------
Douglas Hsieh
/s/ ALEX PALUCH Director December 21, 2004
- -----------------------------
Alex Paluch
/s/ RICHARD A. KASSAR Director December 21, 2004
- -----------------------------
Richard A. Kassar
/s/ LESLIE E. GRODD Director December 21, 2004
- -----------------------------
Leslie E. Grodd
/s/ JOHN J PERKINS Director December 21, 2004
- -----------------------------
John J Perkins
85
FINANCIAL STATEMENT SCHEDULES
VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
Schedule II--Valuation and Qualifying Accounts
Fiscal Years 2004, 2003 and 2002
(Amounts in thousands)
Column A Column B Column C Column D Column E
- ----------------------------- ---------- ------------------ ------------- --------------
Balance at Additions charged
Beginning to cost, expenses, Balance at End
Description of Period revenues Deductions(1) of Period
- ----------------------------- ---------- ------------------ ------------- --------------
Accounts receivable reserves:
2004...................... $2,300 $12,491 $10,048 $4,743
2003...................... 2,250 6,665 6,615 2,300
2002...................... 1,160 3,165 2,075 2,250
- --------
(1) write-off of accounts receivable determined to be uncollectible.
86
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
2.1 Merger Agreement by and among CEX Holdings, Inc., Corporate Express Delivery Systems, Inc.,
United Shipping & Technology, Inc. and United Shipping & Technology Acquisition Corp., dated as
of September 8, 1999 (incorporated by reference to the Company's Form 8-K, filed October 8, 1999).
2.2 Amendment No. 1 to Merger Agreement by and among CEX Holdings, Inc., Corporate Express
Delivery Systems, Inc., United Shipping & Technology, Inc. and United Shipping & Technology
Acquisition Corp., dated as of September 22, 1999 (incorporated by reference to the Company's 8-K,
filed October 8, 1999).
2.3 Securities Purchase Agreement among United Shipping & Technology, Inc., TH Lee.Putnam Internet
Partners, L.P. and TH Lee. Putnam Internet Parallel Partners, L.P., dated as of May 15, 2000
(incorporated by reference to the Company's Form 8-K, filed June 2, 2000).
2.4 Securities Purchase Agreement among United Shipping & Technology, Inc., TH Lee.Putnam Internet
Partners, L.P., TH Lee.Putnam Internet Parallel Partners, L.P., THLi Coinvestment Partners LLC and
Blue Star I, LLC, dated as of September 1, 2000 (incorporated by reference to the Company's Form
8-K, filed September 8, 2000).
2.5 Amendment No. 2 to Merger Agreement, Settlement and General Release Agreement by and among
Corporate Express, Inc., successor by merger to CEX Holdings, Inc., Velocity Express, Inc. f/k/a
Corporate Express Delivery Systems, Inc., and United Shipping & Technology, Inc. dated August 2,
2001 (incorporated by reference to the Company's Form 10-Q, filed November 13, 2001).
2.6 Agreement and Plan of Merger by and between United Shipping & Technology, Inc., a Utah
corporation, and Velocity Express Corporation, a Delaware corporation, dated as of December 6,
2001 (incorporated by reference to the Company's Form 8-K, filed January 9, 2002).
2.7 Certificate of Merger of United Shipping & Technology, Inc. (a Utah corporation) into Velocity
Express Corporation (a Delaware corporation) (incorporated by reference to the Company's Form
10-K filed September 27, 2002).
3.1 Amended and Restated Certificate of Incorporation of Velocity Express Corporation (incorporated by
reference to the Company's Form 10-K filed October 14, 2003).
3.2 Certificate of Amendment to Amended and Restated Certificate of Incorporation of Velocity Express
Corporation (incorporated by reference to the Company's Form S-3/A, File No. 333-88568, filed
June 3, 2002).
3.3 Certificate of Designation of Preferences and Rights of Series G Convertible Preferred Stock
(incorporated by reference to the Company's Form 10-K filed September 27, 2002).
3.4 Certificate of Designation of Preferences and Rights of Series H Convertible Preferred Stock and
Articles of Amendment to the Restated Articles of Incorporation (incorporated by reference to the
Company's Form 10-Q filed February 18, 2003).
3.5 Bylaws of Velocity Express Corporation (incorporated by reference to the Company's Form 8-K,
filed January 9, 2002).
4.1 Specimen form of the Company's Common Stock certificate (incorporated by reference to the
Company's Statement on Form SB-2, File No. 333-01652C).
4.2 Specimen form of Velocity Express Corporation Common Stock Certificate (incorporated by
reference to the Company's Form 8-K filed April 5, 2002).
4.3 Specimen form of Velocity Express Corporation Common Stock Certificate (incorporated by
reference to the Company's Form 10-K filed September 27, 2002).
10.1 1996 Director Stock Option Plan, as amended (incorporated by reference to the Company's Form
10-QSB for the fiscal quarter ended January 1, 2000).
87
Exhibit
Number Description
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10.2 2000 Stock Option Plan (incorporated by reference to the Company's Definitive Schedule 14A filed
on May 8, 2000).
10.3 Exchange Agreement by and among United Shipping & Technology, Inc., UST Delivery Systems,
Inc. and CEX Holdings, Inc., dated as of September 24, 1999 (incorporated by reference to the
Company's Form 8-K, filed October 8, 1999).
10.4 Stock Purchase Warrant to Acquire Series C Preferred Stock, issued September 1, 2000 by United
Shipping & Technology, Inc. to TH Lee.Putnam Internet Partners, L.P. for 187,290 shares of Series
C Preferred Stock at a price per share equal to $0.01 (incorporated by reference to the Company's
Form 8-K, filed September 8, 2000).
10.5 Stock Purchase Warrant to Acquire Series C Preferred Stock, issued September 1, 2000 by United
Shipping & Technology, Inc. to TH Lee.Putnam Internet Partners, L.P. for 142,042 shares of Series
C Preferred Stock at a price per share equal to $0.01 (incorporated by reference to the Company's
Form 8-K, filed September 8, 2000).
10.6 Stock Purchase Warrant to Acquire Series C Preferred Stock, issued September 1, 2000 by United
Shipping & Technology, Inc. to THLi Coinvestment Partners, LLC for 10,598 shares of Series C
Preferred Stock at a price per share equal to $0.01 (incorporated by reference to the Company's Form
8-K, filed September 8, 2000).
10.7 Stock Purchase Warrant to Acquire Series C Preferred Stock, issued September 1, 2000 by United
Shipping & Technology, Inc. to Blue Star I, LLC for 4,024 shares of Series C Preferred Stock at a
price per share equal to $0.01 (incorporated by reference to the Company's Form 8-K, filed
September 8, 2000).
10.8 Stock Purchase Warrant to Acquire Series C Preferred Stock, to be issued at the time of the Second
Closing by United Shipping & Technology, Inc. to TH Lee.Putnam Internet Partners, L.P. for
262,204 shares of Series C Preferred Stock at a price per share equal to $0.01 (incorporated by
reference to the Company's Form 8-K, filed September 8, 2000).
10.9 Stock Purchase Warrant to Acquire Series C Preferred Stock, to be issued at the time of the Second
Closing by United Shipping & Technology, Inc. to TH Lee.Putnam Internet Parallel Partners, L.P.
for 198,855 shares of Series C Preferred Stock at a price per share equal to $0.01 (incorporated by
reference to the Company's Form 8-K, filed September 8, 2000).
10.10 Stock Purchase Warrant to Acquire Series C Preferred Stock, to be issued at the time of the Second
Closing by United Shipping & Technology, Inc. to THLi Coinvestment Partners LLC for 14,837
shares of Series C Preferred Stock at a price per share equal to $0.01 (incorporated by reference to
the Company's Form 8-K, filed September 8, 2000).
10.11 Stock Purchase Warrant to Acquire Series C Preferred Stock, to be issued at the time of the Second
Closing by United Shipping & Technology, Inc. to Blue Star I, LLC for 5,634 shares of Series C
Preferred Stock at a price per share equal to $0.01 (incorporated by reference to the Company's Form
8-K, filed September 8, 2000).
10.12 Form of non-qualified stock option issued to employees as of June 2000 (incorporated by reference
to the Company's Statement on Form 10-KSB for the fiscal year ended July 1, 2000).
10.13 Form of Stock Purchase Warrant to Acquire Preferred Stock dated January 4, 2001, issued by the
Company to TH Lee.Putnam Internet Partners, L.P., TH Lee.Putnam Internet Parallel Partners, L.P.,
THLi Coinvestment Partners LLC and Blue Star I, LLC (incorporated by reference to the Company's
Current Report on Form 8-K, filed January 9, 2001).
10.14 Form of Stock Purchase Agreement to acquire Subscription Notes presently convertible into an
aggregate 624,906 shares of Series D Preferred entered into during March 2001 between the Company
and TenX Venture Partners, LLC, HomePoint Corporation, Salah Al-Qahtani and AL-MAL Islamic
Company (incorporated by reference to the Company's Form 8-K, filed May 21, 2001).
88
Exhibit
Number Description
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10.15 Form of Subscription Notes presently convertible into an aggregate 624,906 shares of Series D
Preferred issued to TenX Venture Partners, LLC, HomePoint Corporation, Salah Al-Qahtani and
AL-MAL Islamic Company pursuant to Stock Purchase Agreements entered into during March 2001
(incorporated by reference to the Company's Form 8-K, filed May 21, 2001).
10.16 Form of Warrant to purchase shares of Series D Preferred issued to entities affiliated with TH
Lee.Putnam Internet Parallel Partners, L.P. on January 4, 2001 (incorporated by reference to the
Company's Form 8-K, filed May 21, 2001).
10.17 Form of Subscription Note Purchase Agreement to purchase Series F Convertible Preferred Stock
entered into between the Company and certain investors in July of 2001. (incorporated by reference
to the Company's Form 10-KSB for the year ended June 30, 2001).
10.18 Form of Subscription Note issued in connection with the Company's Series F Convertible Preferred
Stock financing in July of 2001. (incorporated by reference to the Company's Form 10-KSB for the
year ended June 30, 2001).
10.19 Form of Warrant to purchase shares of Common Stock used in connection with the Company's
Series F Convertible Preferred Stock financing in July of 2001. (incorporated by reference to the
Company's Form 10-KSB for the year ended June 30, 2001).
10.20 Third Amended and Restated Registration Rights Agreement dated as of July 2001, among the
Company, TH Lee.Putnam Internet Partners, L.P., TH Lee.Putnam Internet Parallel Partners, L.P.,
THLi Coinvestment Partners LLC, Blue Star I, LLC, RS Investment Management, Inc., Marshall T.
Masko, Home Point Corporation, TenX Venture Partners, LLC, Al-Mal Islamic Company, Sheikh
Salah A.H. Al-Qahtani and each Series F Convertible Preferred Stock purchaser. (incorporated by
reference to the Company's Form 10-KSB for the year ended June 30, 2001).
10.21 Warrant to purchase up to 1,000,000 shares of Common Stock at a price of $0.40 per share issued by
the Company to BLG Ventures, LLC dated August 23, 2001 (incorporated by reference to the
Company's Form 10-Q filed November 13, 2001).
10.22 Loan and Security Agreement by and among Velocity Express, Inc. and related borrowers, and Fleet
Capital Corporation dated as of January 25, 2002. (incorporated by reference to the Company's Form
10-Q filed May 3, 2002).
10.23 Form of Incentive Stock Option Agreement between United Shipping & Technology, Inc., and
management, dated October 29, 2001. (incorporated by reference to the Company's Form 10-Q filed
May 3, 2002).
10.24 Form of Stock Purchase Agreement to purchase Series G Convertible Preferred Stock entered into
between the Company and certain investors on May 3, 2002. (incorporated by reference to the
Company's Form 10-K/A-2 filed July 28, 2003).
10.25 Form of Stock Purchase Agreement to purchase Series H Convertible Preferred Stock (incorporated
by reference to the Company's Form 10-Q filed May 16, 2003).
10.26 Form of Common Stock Warrant issued in connection with the Company's Series H Convertible
Preferred Stock financing (incorporated by reference to the Company's Form 10-Q filed February 18,
2003).
10.27 Amended and Restated Loan and Security Agreement by and among Velocity Express, Inc. and
related borrowers, and Fleet Capital Corporation dated as of November 26, 2003 (incorporated by
reference to the Company's Form 10-Q filed February 7, 2004).
10.28 Note Purchase Agreement by and among Velocity Express, Inc., Velocity Express Corporation and
BET Associates LP dated as of November 26, 2003 (incorporated by reference to the Company's
Form 10-Q filed February 7, 2004).
89
Exhibit
Number Description
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10.29 Senior Subordinated Note by and among Velocity Express, Inc., Velocity Express Corporation and
BET Associates LP, dated as of November 26, 2003 (incorporated by reference to the Company's
Form 10-Q filed February 7, 2004).
10.30 Employment Agreement between Velocity Express, Inc. and Wesley C. Fredenburg (incorporated by
reference to the Company's Form 10-Q filed February 7, 2004).
10.31 Employment Agreement between Velocity Express, Inc. and Jeffrey Hendrickson dated December
15, 2003 (incorporated by reference to the Company's Form 10-Q filed February 7, 2004).
10.32 Employment Agreement between Velocity Express, Inc. and John Marsalisi dated December 22,
2003 (incorporated by reference to the Company's Form 10-Q filed February 7, 2004).
10.33 Form of Stock Purchase Agreement to purchase Series I Convertible Preferred Stock (incorporated
by reference to the Company's Form 10-Q filed February 7, 2004).
10.34 Form of Stock Purchase Agreement to purchase Series J Convertible Preferred Stock (incorporated
by reference to the Company's Form 10-Q filed May 11, 2004).
10.35 Form of Common Stock Warrant between Velocity Express Corporation and management, dated
February 12, 2004 (incorporated by reference to the Company's Form 10-Q filed May 11, 2004).
10.36 Velocity Express Corporation Code of Business Conduct and Ethics.
10.37 Employment Agreement between Velocity Express, Inc. and Andrew B. Kronick dated November
28, 2001.
10.38 Employment Agreement between Velocity Express, Inc. and Robert B. Lewis dated January 12,
2004.
10.39 Contractor Services Agreement between Velocity Express Corporation and MCG Global, LLC.
10.40 Stock Purchase Warrant to purchase up to 9,677,553 shares of Common Stock at a price of $0.0001
per share issued to TH Lee Putnam Ventures, L.P., TH Lee Putnam Parallel Ventures, L.P., THLi
Coinvestment Partners, LLC and Blue Star I, LLC dated December 21, 2004
10.41 Stock Purchase Agreement to purchase 7,000,000 shares of the Company's Series L Convertible
Preferred Stock, par value $0.004 per share, at a price of $1.00 per Preferred Share, entered into
between the Company and TH Lee Putnam Ventures, L.P., TH Lee Putnam Parallel Ventures, L.P.,
THLi Coinvestment Partners, LLC and Blue Star I, LLC dated December 21, 2004
21.1 Subsidiaries.
23.1 Consent of Ernst & Young LLP.
31.1 Section 302 Certification of CEO.
31.2 Section 302 Certification of CFO.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.1 Capital Contribution Agreement dated July 1, 2004.
99.2 Agency Agreement between Velocity Express, Inc. and Peritas, LLC dated May 25, 2004.
90