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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended April 2, 2005
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to .
------- -------
Commission File No. 0-28452
VELOCITY EXPRESS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 87-0355929
(State or other jurisdiction of (IRS Employer 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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Check whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
YES [X] NO [ ]
Check whether the registrant is an accelerated filer (as defined in Rule 12b-2
of the Exchange Act).
YES [ ] NO [X]
As of May 10, 2005 there were 13,064,045 shares of common stock of the
registrant issued and outstanding.
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VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
April 2, 2005
Page
----
Part I. Financial Information....................................... 3
ITEM 1. Consolidated Financial Statements (Unaudited)
Balance Sheets as of April 2, 2005 and July 3, 2004...... 3
Statements of Operations for the Three and Nine Months
Ended April 2, 2005 and March 27, 2004................ 4
Statement of Shareholders' Equity for the Nine Months
Ended April 2, 2005................................... 5
Statements of Cash Flows for the Nine Months Ended
April 2, 2005 and March 27, 2004...................... 6
Notes to Consolidated Financial Statements............... 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 15
ITEM 3. Quantitative and Qualitative Disclosures About Market
Risk..................................................... 23
ITEM 4. Controls and Procedures..................................... 23
Part II. Other Information........................................... 24
ITEM 1. Legal Proceedings........................................... 24
ITEM 2. Changes in Securities and Use of Proceeds................... 25
ITEM 3. Defaults Upon Senior Securities............................. 25
ITEM 4. Submission of Matters to a Vote of Security Holders......... 26
ITEM 5. Other Information........................................... 28
ITEM 6. Exhibits and Reports on Form 8-K............................ 28
Signatures............................................................... 29
2
VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except par value)
April 2, July 3,
2005 2004
----------- ---------
(unaudited)
ASSETS
Current assets:
Cash $ 5,874 $ 1,220
Accounts receivable, net of allowance of $5,339 and $4,743
at April 2, 2005 and July 3, 2004, respectively 26,531 27,419
Accounts receivable - other 1,155 592
Prepaid workers' compensation and auto liability insurance 5,127 6,289
Other prepaid expenses 741 2,185
Other current assets (including deferred financing costs) 1,364 317
--------- ---------
Total current assets 40,792 38,022
Property and equipment, net 10,553 11,362
Goodwill 42,830 42,830
Deferred financing costs, net 1,088 235
Other assets 1,287 1,227
--------- ---------
Total assets $ 96,550 $ 93,676
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable 20,694 $ 26,481
Accrued insurance and claims 4,013 3,697
Accrued wages and benefits 2,564 3,738
Accrued legal and claims 1,880 2,926
Due to related parties 3,564 3,625
Other accrued liabilities 1,240 2,090
Current portion of long-term debt 32,244 31,008
--------- ---------
Total current liabilities 66,199 73,565
Long-term debt less current portion 3,379 5,235
Accrued insurance and claims 4,270 8,400
Shareholders' equity:
Preferred stock, $0.004 par value, 345,239 shares authorized
6,272 and 32,919 shares issued and outstanding at
April 2, 2005 and July 3, 2004, respectively 22,068 91,051
Preferred warrants, 0 and 1,042 outstanding at
April 2, 2005 and July 3, 2004, respectively -- 7,600
Common stock, $0.004 par value,13,085 shares authorized
13,065 and 10,415 shares issued and outstanding at
April 2, 2005 and July 3, 2004, respectively 52 42
Subscriptions receivable (including related party of $7,500
at April 2, 2005) (7,543) (100)
Additional paid-in-capital 282,061 101,120
Accumulated deficit (273,904) (193,058)
Foreign currency translation (32) (179)
--------- ---------
Total shareholders' equity 22,702 6,476
--------- ---------
Total liabilities and shareholders' equity $ 96,550 $ 93,676
========= =========
See notes to consolidated financial statements.
3
VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per share data)
Three Months Ended Nine Months Ended
-------------------- --------------------
April 2, March 27, April 2, March 27,
2005 2004 2005 2004
-------- --------- -------------------
Revenue $ 66,137 $67,986 $199,561 $215,895
Cost of services 54,118 56,523 163,184 175,384
-------- ------- -------- --------
Gross profit 12,019 11,463 36,377 40,511
Operating expenses:
Occupancy 3,622 3,605 10,693 10,129
Selling, general and administrative 19,853 16,943 51,052 47,962
-------- ------- -------- --------
Total operating expenses 23,475 20,548 61,745 58,091
-------- ------- -------- --------
Loss from operations (11,456) (9,085) (25,368) (17,580)
Other expense:
Interest expense (1,993) (701) (3,631) (3,641)
Other 223 -- 408 --
-------- ------- -------- --------
Net loss $(13,226) $(9,786) $(28,591) $(21,221)
======== ======= ======== ========
Net loss applicable to common shareholders $(36,337) $(9,786) $(80,847) $(46,436)
======== ======= ======== ========
Net loss per share applicable to common shareholders:
Basic $ (5.30) $(65.27) $ (33.17) $(378.88)
======== ======= ======== ========
Diluted $ (5.30) $(65.27) $ (33.17) $(378.88)
======== ======= ======== ========
Weighted average shares outstanding
[adjusted for 1:50 reverse stock split]
Basic 6,850 150 2,437 123
======== ======= ======== ========
Diluted 6,850 150 2,437 123
======== ======= ======== ========
See notes to consolidated financial statements.
4
(Amounts in thousands) (Unaudited)
Series B Series C Series D Series F
Preferred Stock Preferred Stock Preferred Stock Preferred Stock
----------------- ----------------- ---------------- ----------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ -------- ------ -------- ------ ------- ------ -------
Balance at July 3, 2004 2,807 $ 24,304 2,000 $ 13,600 1,517 $ 8,308 740 $ 7,802
Stock options -- -- -- -- -- -- -- --
Warrants issued to contractors for
services -- -- -- -- -- -- -- --
Warrant exercises - Common Stock -- -- -- -- -- -- -- --
Warrant exercises - Preferred Stock -- -- 825 4,953 217 1,191 -- --
Offering costs -- -- -- -- -- -- -- --
Payments against stock subscription
receivable -- -- -- -- -- -- -- --
Additional subscription receivable -- -- -- -- -- -- -- --
Issuance of Series J Preferred Stock -- -- -- -- -- -- -- --
Issuance of Series K Preferred Stock -- -- -- -- -- -- -- --
Issuance of Series L Preferred Stock -- -- -- -- -- -- -- --
Issuance of Series M Preferred Stock -- -- -- -- -- -- -- --
Series M Preferred Stock issued for
services rendered -- -- -- -- -- -- -- --
Series M Preferred Stock issued for
interest PIK -- -- -- -- -- -- -- --
Beneficial conversion of
Series J Preferred Stock -- -- -- -- -- -- -- --
Beneficial conversion of
Series K Preferred Stock -- -- -- -- -- -- -- --
Beneficial conversion of
Series L Preferred Stock -- -- -- -- -- -- -- --
Beneficial conversion of
Series M Preferred Stock -- -- -- -- -- -- -- --
Conversion of Series B to Common Stock (2,807) (24,304) -- -- -- -- -- --
Conversion of Series C to Common Stock -- -- (2,825) (18,553) -- -- -- --
Conversion of Series D to Common Stock -- -- -- -- (1,734) (9,499) -- --
Conversion of Series F to Common Stock -- -- -- -- -- -- (740) (7,802)
Conversion of Series G to Common Stock -- -- -- -- -- -- -- --
Conversion of Series H to Common Stock -- -- -- -- -- -- -- --
Conversion of Series I to Common Stock -- -- -- -- -- -- -- --
Conversion of Series J to Common Stock -- -- -- -- -- -- -- --
Conversion of Series K to Common Stock -- -- -- -- -- -- -- --
Conversion of Series L to Common Stock -- -- -- -- -- -- -- --
Reverse Common Stock Split - 1 for 50
Net loss -- -- -- -- -- -- -- --
Foreign currency translation -- -- -- -- -- -- -- --
Comprehensive loss -- -- -- -- -- -- -- --
------ -------- ------ -------- ------ ------- ---- -------
Balance at April 2, 2005 -- $ -- -- $ -- -- $ -- -- $ --
====== ======== ====== ======== ====== ======= ==== =======
Series G Series H Series I Series J
Preferred Stock Preferred Stock Preferred Stock Preferred Stock
---------------- ---------------- ------------------ -----------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------- ------ ------- ------- -------- ------ --------
Balance at July 3, 2004 5,478 $ 4,087 478 $ 3,761 16,810 $ 24,558 3,088 $ 4,631
Stock options -- -- -- -- -- -- -- --
Warrants issued to contractors for
services -- -- -- -- -- -- -- --
Warrant exercises - Common Stock -- -- -- -- -- -- -- --
Warrant exercises - Preferred Stock -- -- -- -- -- -- -- --
Offering costs -- -- -- -- -- -- -- --
Payments against stock subscription
receivable -- -- -- -- -- -- -- --
Additional subscription receivable -- -- -- -- -- -- -- --
Issuance of Series J Preferred Stock -- -- -- -- -- -- 4,912 7,368
Issuance of Series K Preferred Stock -- -- -- -- -- -- -- --
Issuance of Series L Preferred Stock -- -- -- -- -- -- -- --
Issuance of Series M Preferred Stock -- -- -- -- -- -- -- --
Series M Preferred Stock issued for
services rendered -- -- -- -- -- -- -- --
Series M Preferred Stock issued for
interest PIK -- -- -- -- -- -- -- --
Beneficial conversion of
Series J Preferred Stock -- -- -- -- -- -- -- --
Beneficial conversion of
Series K Preferred Stock -- -- -- -- -- -- -- --
Beneficial conversion of
Series L Preferred Stock -- -- -- -- -- -- -- --
Beneficial conversion of
Series M Preferred Stock -- -- -- -- -- -- -- --
Conversion of Series B to Common Stock -- -- -- -- -- -- -- --
Conversion of Series C to Common Stock -- -- -- -- -- -- -- --
Conversion of Series D to Common Stock -- -- -- -- -- -- -- --
Conversion of Series F to Common Stock -- -- -- -- -- -- -- --
Conversion of Series G to Common Stock (5,478) (4,087) -- -- -- -- -- --
Conversion of Series H to Common Stock -- -- (478) (3,761) -- -- -- --
Conversion of Series I to Common Stock -- -- -- -- (16,810) (24,558) -- --
Conversion of Series J to Common Stock -- -- -- -- -- -- (8,000) (11,999)
Conversion of Series K to Common Stock -- -- -- -- -- -- -- --
Conversion of Series L to Common Stock -- -- -- -- -- -- -- --
Reverse Common Stock Split - 1 for 50
Net loss -- -- -- -- -- -- -- --
Foreign currency translation -- -- -- -- -- -- -- --
Comprehensive loss -- -- -- -- -- -- -- --
------ ------- ---- ------- ------- -------- ------ --------
Balance at April 2, 2005 -- $ -- -- $ -- -- $ -- -- $ --
====== ======= ==== ======= ======= ======== ====== ========
Series K Series L Series M Preferred Stock
Preferred Stock Preferred Stock Preferred Stock Warrants
----------------- ---------------- ---------------- ----------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ -------- ------ ------- ------ ------- ------ -------
Balance at July 3, 2004 -- -- -- -- -- -- 1,042 $ 7,600
Stock options -- -- -- -- -- -- -- --
Warrants issued to contractors for
services -- -- -- -- -- -- -- --
Warrant exercises - Common Stock -- -- -- -- -- -- -- --
Warrant exercises - Preferred Stock -- -- -- -- -- -- (1,042) (7,600)
Offering costs -- -- -- (1,043) -- --
Payments against stock subscription
receivable -- -- -- -- -- -- -- --
Additional subscription receivable -- -- -- -- -- -- -- --
Issuance of Series J Preferred Stock -- -- -- -- -- -- -- --
Issuance of Series K Preferred Stock 9,852 14,777 -- -- -- -- -- --
Issuance of Series L Preferred Stock -- -- 7,000 7,000 -- -- -- --
Issuance of Series M Preferred Stock -- -- -- -- 6,119 22,550 -- --
Series M Preferred Stock issued for
services rendered -- -- -- -- 98 360 -- --
Series M Preferred Stock issued for
interest PIK -- -- -- -- 54 201 -- --
Beneficial conversion of
Series J Preferred Stock -- -- -- -- -- -- -- --
Beneficial conversion of
Series K Preferred Stock -- -- -- -- -- -- -- --
Beneficial conversion of
Series L Preferred Stock -- -- -- -- -- -- -- --
Beneficial conversion of
Series M Preferred Stock -- -- -- -- -- -- -- --
Conversion of Series B to Common Stock -- -- -- -- -- -- -- --
Conversion of Series C to Common Stock -- -- -- -- -- -- -- --
Conversion of Series D to Common Stock -- -- -- -- -- -- -- --
Conversion of Series F to Common Stock -- -- -- -- -- -- -- --
Conversion of Series G to Common Stock -- -- -- -- -- -- -- --
Conversion of Series H to Common Stock -- -- -- -- -- -- -- --
Conversion of Series I to Common Stock -- -- -- -- -- -- -- --
Conversion of Series J to Common Stock -- -- -- -- -- -- -- --
Conversion of Series K to Common Stock (9,852) (14,777) -- -- -- -- -- --
Conversion of Series L to Common Stock -- -- (7,000) (7,000) -- -- -- --
Reverse Common Stock Split - 1 for 50
Net loss -- -- -- -- -- -- -- --
Foreign currency translation -- -- -- -- -- -- -- --
Comprehensive loss -- -- -- -- -- -- -- --
------ -------- ------ ------- ----- ------- ------ -------
Balance at April 2, 2005 -- $ -- -- $ -- 6,272 $22,068 -- $ --
====== ======== ====== ======= ===== ======= ====== =======
Common Stock Stock Additional Foreign
------------------ Subscription Paid-in Accumulated Currency
Shares Amount Receivable Capital Deficit Translation Total
-------- ------- ------------ ---------- ----------- ----------- --------
Balance at July 3, 2004 10,415 $ 42 $ (100) $101,120 $(193,058) $(179) $ 6,476
Stock options -- -- -- 92 -- -- 92
Warrants issued to contractors for
services -- -- -- 787 -- -- 787
Warrant exercises - Common Stock 1,094 4 -- 7 -- -- 11
Warrant exercises - Preferred Stock -- -- -- 1,467 -- -- 10
Offering costs -- -- -- -- -- -- (1,043)
Payments against stock subscription
receivable -- -- 57 -- -- -- 57
Additional subscription receivable -- -- (7,500) -- -- -- (7,500)
Issuance of Series J Preferred Stock -- -- -- -- -- -- 7,368
Issuance of Series K Preferred Stock -- -- -- -- -- -- 14,777
Issuance of Series L Preferred Stock -- -- -- -- -- -- 7,000
Issuance of Series M Preferred Stock -- -- -- -- -- -- 22,550
Series M Preferred Stock issued for
services rendered -- -- -- -- -- -- 360
Series M Preferred Stock issued for
interest PIK -- -- -- -- -- -- 201
Beneficial conversion of
Series J Preferred Stock -- -- -- 7,368 (7,368) -- --
Beneficial conversion of
Series K Preferred Stock -- -- -- 14,777 (14,777) -- --
Beneficial conversion of
Series L Preferred Stock -- -- -- 7,000 (7,000) -- --
Beneficial conversion of
Series M Preferred Stock -- -- -- 23,111 (23,111) -- --
Conversion of Series B to Common Stock 24,120 96 -- 24,208 -- -- --
Conversion of Series C to Common Stock 16,898 68 -- 18,485 -- -- --
Conversion of Series D to Common Stock 25,518 102 -- 9,397 -- -- --
Conversion of Series F to Common Stock 21,806 87 -- 7,715 -- -- --
Conversion of Series G to Common Stock 6,724 27 -- 4,060 -- -- --
Conversion of Series H to Common Stock 23,967 96 -- 3,665 -- -- --
Conversion of Series I to Common Stock 249,160 997 -- 23,561 -- -- --
Conversion of Series J to Common Stock 97,561 390 -- 11,609 -- -- --
Conversion of Series K to Common Stock 106,006 424 -- 14,353 -- -- --
Conversion of Series L to Common Stock 70,000 280 -- 6,720 -- -- --
Reverse Common Stock Split - 1 for 50 (640,203) (2,561) -- 2,561
Net loss -- -- -- -- (28,591) -- (28,591)
Foreign currency translation -- -- -- -- -- 147 147
--------
Comprehensive loss -- -- -- -- -- -- (28,444)
-------- ------- ------- -------- --------- ----- --------
Balance at April 2, 2005 13,065 $ 52 $(7,543) $282,061 $(273,904) $ (32) 22,702
======== ======= ======= ======== ========= ===== ========
See notes to consolidated financial statements.
5
VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Nine Months Ended
--------------------
April 2, March 27,
2005 2004
-------- ---------
OPERATING ACTIVITIES
Net loss $(28,591) $(21,221)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Depreciation 2,350 2,862
Amortization 1,248 842
Loss from Peritas deconsolidation 75 --
Equity instruments issued in lieu of payment for services received 1,147 2,571
Stock option expense 92 180
Non-cash interest expense/bank charges 201 702
Provision for bad debts 2,209 4,150
Other -- (6)
Change in operating assets and liabilities:
Accounts receivable (1,244) 1,337
Other current assets 1,979 719
Other assets 739 (88)
Accounts payable (5,793) 835
Accrued liabilities (6,965) (4,050)
-------- --------
Cash used in operating activities (32,553) (11,167)
-------- --------
INVESTING ACTIVITIES
Proceeds from sale of assets 63 --
Capital expenditures (2,274) (2,015)
Other -- (124)
-------- --------
Cash used in investing activities (2,211) (2,139)
-------- --------
FINANCING ACTIVITIES
Repayments under revolving credit agreement, net (264) (10,102)
Proceeds from bridge loan -- 1,000
Proceeds from notes payable and long-term debt -- 6,000
Payments on notes payable and long-term debt (388) (5,000)
Proceeds from issuance of preferred stock, net 40,002 21,210
Proceeds from issuance of common stock, net 11 1
Stock subscription receivable, net 57 --
-------- --------
Cash provided by financing activities 39,418 13,109
-------- --------
Net increase (decrease) in cash 4,654 (197)
Cash, beginning of period 1,220 1,589
-------- --------
Cash, end of period $ 5,874 $ 1,392
======== ========
See notes to consolidated financial statements.
6
1. DESCRIPTION OF BUSINESS
Velocity Express Corporation and its subsidiaries (collectively, the
"Company") 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 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.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The consolidated financial statements included
herein have been prepared by Velocity Express Corporation which, together with
its wholly-owned subsidiaries, shall be referred to herein as the "Company,"
pursuant to the rules and regulations of the Securities and Exchange Commission.
In the opinion of the Company, all adjustments consisting only of normal
recurring adjustments, necessary to present fairly the financial position of the
Company as of April 2, 2005, and the results of its operations for the nine
months ended April 2, 2005 and March 27, 2004, and its cash flows for the nine
months ended April 2, 2005 and March 27, 2004 have been included, with the
exception of fiscal 2004 adjustments, which while posted could not be assigned
to any specific quarter as identified in the Company's fiscal 2004 Form 10-K
filed December 23, 2004 as detailed below. The results of operations for the
nine months ended April 2, 2005 are not necessarily indicative of the results
that may be expected for the fiscal year ending July 2, 2005. Certain
information in footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles has been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading.
These consolidated financial statements should be read in conjunction with
the financial statements for the year ended July 3, 2004 (filed December 23,
2004), and the footnotes thereto, included in the Company's Report on Form 10-K,
filed with the Securities and Exchange Commission. In connection with the
preparation of such 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, these weaknesses represent a
risk to the Company.
As part of the Company's fiscal year-end 2004 closing, expenses were
identified that may have had 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 2004 year-end adjustments were recorded as
part of the Company's fourth quarter results. Corrections for the underlying
weaknesses were identified, and annual fiscal 2004 results were fairly
stated. Therefore, the Company can not definitively ascertain that these
adjustments would not have materially impacted the first three quarters of
fiscal 2004 results, which are reported herein.
Principles of Consolidation - The consolidated financial statements include
the accounts of Velocity Express Corporation and its wholly-owned subsidiaries.
All inter-company balances and transactions have been eliminated in the
consolidation. The consolidated financial statements no longer include Peritas
as a result of the Company's evaluation of the requirements of FASB
Interpretation No. 46, Consolidation of Variable Interest Entities ["FIN No.
46"]. [See footnote 3, Consolidated Financial Interest Entity]
7
Reclassifications - Certain reclassifications have been made to the prior
period consolidated financial statements to conform to the current period
presentation.
Comprehensive loss - Comprehensive loss was $28.4 million and $21.3 million
for the nine months ended April 2, 2005 and March 27, 2004, respectively. The
difference between net loss and total comprehensive loss in the respective
periods related to foreign currency translation adjustments.
New accounting pronouncements - In December 2004, the Financial Accounting
Standards Board (FASB) issued FASB Statement No. 123 (revised 2004),
Shared-Based Payment, which is a revision of FASB Statement No. 123, Accounting
for Stock-Based Compensation. Statement 123(R) supersedes ABP Opinion No. 25,
Accounting for Stock Issued to Employees, and amends FASB No. 95, Statement of
Cash Flows. Generally the approach in Statement 123(R) is similar to the
approach described in Statement 123. However, Statement 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based on their fair values. Proforma
disclosure will no longer be an alternative. The provisions in Statement 123(R)
are effective for all stock options or other equity-based awards to employees or
directors that vest or become exercisable in the Company's first quarter of
fiscal 2006. The Company is evaluating the impact that Statement 123(R) will
have on the consolidated financial statements.
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.
The following table sets forth a reconciliation of the numerators and
denominators of basic and diluted net loss per common share:
Three Months Ended Nine Months Ended
-------------------- --------------------
April 2, March 27, April 2, March 27,
2005 2004 2005 2004
-------- --------- -------- ---------
(Amounts in thousands, except per share data)
Numerator:
Net loss $(13,226) $ (9,786) $(28,591) $(21,221)
Beneficial conversion feature for Series I Preferred -- -- -- (25,215)
Beneficial conversion feature for Series J Preferred -- -- (7,368) --
Beneficial conversion feature for Series K Preferred -- -- (14,777) --
Beneficial conversion feature for Series L Preferred -- -- (7,000) --
Beneficial conversion feature for Series M Preferred (23,111) (23,111)
-------- -------- -------- --------
Net loss applicable to common shareholders $(36,337) $ (9,786) $(80,847) $(46,436)
======== ======== ======== ========
Denominator:
Weighted average shares 6,850 150 2,437 123
-------- -------- -------- --------
Total common equivalents outstanding 6,850 150 2,437 123
======== ======== ======== ========
Net loss per share:
Basic $ (5.30) $ (65.27) $ (33.17) $(378.88)
======== ======== ======== ========
Diluted $ (5.30) $ (65.27) $ (33.17) $(378.88)
======== ======== ======== ========
The following table presents securities that could be converted into common
shares and 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:
8
Three Months Ended Nine Months Ended
-------------------- --------------------
April 2, March 27, April 2, March 27,
2005 2004 2005 2004
-------- --------- -------- ---------
(Amounts in thousands)
Common warrants 337 158 275 135
Preferred warrants:
Series C Convertible Preferred -- 67 -- 67
Series D Convertible Preferred -- 43 -- 43
Series M Convertible Preferred 52 -- 17 --
Convertible preferred stock:
Series B Convertible Preferred -- 328 -- 328
Series C Convertible Preferred -- 162 -- 162
Series D Convertible Preferred -- 303 -- 303
Series F Convertible Preferred -- 327 -- 345
Series G Convertible Preferred -- 95 -- 97
Series H Convertible Preferred -- 345 -- 345
Series I Convertible Preferred -- 3,396 -- 1,676
Series M Convertible Preferred 3,278 -- 1,089 --
----- ----- ----- -----
3,667 5,225 1,381 3,502
----- ----- ----- -----
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.
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. As disclosed
under New Accounting Pronouncements, the Company will be required under SFAS No.
123(R) to adopt the fair value-based method in the first quarter of fiscal 2006.
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:
Three Months Ended Nine Months Ended
-------------------- --------------------
April 2, March 27, April 2, March 27,
2005 2004 2005 2004
-------- --------- -------- ---------
(Amounts in thousands, except per share data)
Net loss applicable to common shareholders,
as reported $(36,337) $(9,786) $(80,847) $(46,436)
Add: Stock-based employee compensation
expense included in reported net loss
applicable to common shareholders 32 32 96 96
Deduct: Stock-based compensation expense
determined under fair value method
for all awards (66) (5) (126) (371)
-------- ------- -------- --------
Pro forma $(36,371) $(9,759) $(80,877) $(46,711)
======== ======= ======== ========
Basic and diluted loss per common share:
As reported $ (5.30) $(65.27) $ (33.17) $(378.88)
======== ======= ======== ========
Pro forma $ (5.30) $(65.09) $ (33.17) $(381.13)
======== ======= ======== ========
9
3 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 ("MCG"), 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. 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.
During August 2004, Peritas reimbursed Velocity for its initial vehicle
purchases of $799,000. Additional vehicle purchases amounting to $987,000 have
been subsequently made by Velocity on behalf of Peritas and repaid. During
November 2004, Peritas was purchased from MCG by TH Lee Putnam Ventures
("THLPV"), another of Velocity's large investors. As THLPV acquired the
significant beneficial interest and risk exposure in Peritas, Velocity no longer
has a variable interest in Peritas that is at risk of disproportionate loss
pursuant to its voting rights. Accordingly, Peritas was deconsolidated from the
Company's financial statements upon the completion of these transactions.
4. LONG-TERM DEBT
Long-term debt consisted of the following:
April 2, July 3,
2005 2004
---------- ---------
(Amounts in thousands)
Revolving note $ 29,267 $ 29,531
Senior subordinated note [See footnote 5,
SHAREHOLDERS' EQUITY] 5,587 5,468
Other 769 1,244
-------- --------
35,623 36,243
Less current maturities (32,244) (31,008)
-------- --------
Total $ 3,379 $ 5,235
======== ========
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% (7.25% at April 2, 2005), or, at the Company's
election, at LIBOR plus 3.25%. As of April 2, 2005, the Company has 34.17% of
the facility usage under LIBOR contracts at an interest rate of 6.13%. 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 account receivables have been
pledged to secure borrowings under the revolving note. The Company also
maintains a $6.0 million senior subordinated note with interest payable
quarterly at 15% per annum (to be reduced to 12% upon the occurrence of certain
events), with a quarterly principal repayment schedule, subject to approval by
the primary lender, commencing January 2005 terminating with a final payment at
October 31, 2007. To date the primary lender has not provided approval for such
payments to the subordinated debtholder.
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.
10
. 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,
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, July 1, 2004 and December 21, 2004, the Company entered
into the third, fourth and fifth 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.
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 defaults existing at that time 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.
At April 2, 2005, the Company was in violation of certain non-financial
affirmative covenants under the revolving credit facility and its senior
subordinated debt facility with respect to furnishing financial statements on a
timely basis to the respective lenders [See footnote 6, Liquidity].
5. SHAREHOLDERS' EQUITY
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, April and July
2004, the Company contracted to issue, upon shareholder approval, 7,999,993
shares of Series J Preferred to investors for $1.50 per share. As part of the
Board's action it approved the option of funding the investment in the Series J
Preferred by THLPV in the form of a letter of credit that would later be
replaced by a cash investment in a like amount. This transaction was completed
between the Company and THLPV, and it affiliates, on July 26, 2004. Since the
Company has not received cash as of April 2, 2005, $7.5 million has been
reflected in stockholder equity as a Subscriptions Receivable. The issuance of
the Series J Preferred was subject to shareholder approval and was non-voting
unless it was converted into common stock. On February 14, 2005 the shareholders
voted to approve the issuance of Series J Preferred shares and 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 was $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 were
convertible were subject to adjustment in order to prevent dilution. The Series
J Preferred was deemed to have contained a beneficial conversion amounting to
$12.0 million, $4.6 million of which was recognized in the fourth quarter of
fiscal 2004, and $7.4 million of which was recognized in the first quarter of
fiscal 2005, as charges against net loss available to common shareholders in the
respective fiscal quarters. In accordance with the shareholders approval of an
amendment to provide for mandatory conversion of all certain preferred shares,
they were converted to Common Stock on February 15, 2005.
Series K Convertible Preferred Stock - On June 30, 2004, the Company's
Board of Directors authorized the sale of up to $25.0 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
11
received net proceeds of approximately $10.9 million. The issuance of the Series
K Preferred was subject to shareholder approval and was non-voting unless it was
converted into common stock. On February 14, 2005 the shareholders voted to
approve the issuance of Series K Preferred shares and 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 K Preferred was $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 was convertible were
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 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 and at that time recognized
an additional charge against net loss available to common shareholders of $3.9
million to reflect the beneficial conversion. In accordance with the
shareholders approval of an amendment to provide for mandatory conversion of all
certain preferred shares, they were converted to Common Stock on February 15,
2005.
Series L Convertible Preferred Stock -The Company entered into a Stock
Purchase Agreement on December 21, 2004, pursuant to which the Company sold,
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 issuance of the Series L Preferred was subject to shareholder approval and
was non-voting unless it was converted into common stock. Additionally,
shareholder approval was 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. On February 14, 2005 the shareholders voted to
approve the issuance of Series L Preferred shares and 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 conversion price of the Series L
Preferred was $0.10 per common share, and, at the time the stock purchase
agreements were executed, assuming that the Series L Preferred were issued and
convertible then, each share of Series L Preferred was 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 contained a beneficial conversion
amounting to $7.0 million which was recognized as a deemed dividend to preferred
shareholders at the time of the sale and a charge against net loss available to
common shareholders. In accordance with the shareholders approval of an
amendment to provide for mandatory conversion of all certain preferred shares,
they were converted to Common Stock on February 15, 2005.
Series M Convertible Preferred Stock - On December 21, 2004, the Company
signed a purchase agreement to raise approximately $21.0 million of new equity
capital investment. The investment was initially in the form of a convertible
note that automatically converted into Series M Convertible Preferred Stock
("Series M Preferred") 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 Series M Preferred accrue cumulative PIK dividends equal
to 6% per annum. In the event the Company's shareholders did not approve the
transaction, the interest rate would have increased to 19% per annum. 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 Series M Preferred will be
entitled to a preference on liquidation equal to one times (1x) the original
purchase price of the Series M Preferred 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. Such amounts were
reflected in the 2nd quarter of fiscal 2005 financial statements as debt until
the transaction received formal shareholder approval at the shareholders'
meeting held on February 14, 2005.
Under the Purchase Agreement, the Company was allowed also sell up to an
additional $2,000,000 in principal amount of the Notes ("Additional Notes")
under the terms of the Purchase Agreement for up to 30 days after the December
21, 2004 ("Additional Note Sale Period"). By January 27, 2005, all of the
Investors have consented to extending the Additional Note Sale Period until
January 31, 2005. However, the Purchase Agreement was not formally amended. The
Company sold an additional $1,910,000 in principal amount of the
12
Additional Notes on January 31, 2005 in a private placement to certain holders
of its Preferred Stock. Mr. Alexander Paluch, a member of the Company's Board of
Directors, purchased $40,000 of the Additional Notes and East River II, LP, an
investment fund for which Mr. Paluch serves as a General Partner, purchased
$250,000 of the Additional Notes in this offering.
Subsequent to shareholder approval, the amounts of the total Series M
Preferred investment, plus accrued dividends, less related unamortized debt
issue costs, $22.9 million, $0.2 million, and $1.0 million, respectively, were
reclassified on the Company's balance sheet as components of Shareholders'
Equity. The Series M Preferred is deemed to contain a beneficial conversion
amounting to approximately $23.1 million which was recognized as a charge
against net loss available to common shareholders at the time that the notes
converted to equity.
Warrant to Purchase Common Stock - As part of the Series M Preferred
private placement, THLPV agreed to extend for a two-year period the July 1, 2004
capital contribution agreement previously entered into between THLPV and the
Company's lenders in support of the Company's revolving credit facility. 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-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 which granted on February 14, 2005, a warrant to
purchase 9,677,553 pre-reverse stock split shares of common stock. The term of
the warrant will be five years, and the warrant will have an exercise price of
$0.0001 per share. Due to the pricing of the warrant, the Company recorded $2.3
million as a deferred financing cost.
Conversion of Preferred Shares to Common - Consistent with the terms of the
Series M Convertible Preferred Stock offering ratification at the annual
shareholders' meeting held on February 14, 2005, and amendment of the Company's
charter, all shareholders of previously issued Preferred Series B through L
automatically converted their shares of preferred stock to common stock.
Reverse Stock Split - Pursuant to the Company's discussions with the
NASDAQ, shareholder approval was granted for a 1:50 reverse stock split at the
annual shareholders' meeting held on February 14, 2005. Such reverse stock split
became effective with the trading of shares on February 16, 2005.
6. LIQUIDITY
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company reported a loss from operations of approximately $25.4
million for the nine months ended April 2, 2005; and, had negative working
capital of approximately $25.4 million at April 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 were to be in effect through January 1, 2005; and
pursuant to the Company's receipt of $21.0 million of investment capital [See
footnote 5, Shareholders' Equity], on December 21, 2004 the Company obtained
additional 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
13
applicable month and (b) availability under the credit facility for each day of
the immediate preceding thirty days is greater than or equal to $1,000,000.
At April 2, 2005, the Company was in violation of certain non-financial
affirmative covenants under the revolving credit facility and its senior
subordinated debt facility with respect to furnishing financial statements on a
timely basis to the respective lenders. The Company's ability to continue as a
going concern is dependent on its ability to finance its operations under the
revolving credit agreement and its subordinated debt facility. The Company has
initiated efforts to obtain waivers with respect to the aforementioned debt
covenants.
On April 28, 2005 the Company entered into a Stock Agreement, pursuant to
which the Company sold 2,544,097 shares of Series N Preferred to investors for
$3.685 per share for net proceeds of approximately $9.375 million [See footnote
8, Subsequent Events].
7. RESTRUCTURING
During the quarter ended April 2, 2005, the Company recorded a charge of
approximately $602,000 in "Selling, general & administrative expenses" related
to restructuring, an estimated $593,000 of which related to severance costs
associated with a reduction in force. About 200 employees were terminated
nationwide. Roughly $9,000 of the charge related to lease contract termination
costs. In connection with the restructuring, we expect to incur additional lease
contract termination costs during the fourth quarter ended July 2, 2005.
8. SUBSEQUENT EVENTS
New Equity Investments Series N - The Company entered into a Stock
Agreement on April 28, 2005, pursuant to which the Company sold 2,544,097 shares
of Series N Preferred to investors for $3.685 per share for net proceeds of
approximately $9.375 million. The Series N Convertible Preferred Stock is
entitled to receive in preference to holders of all other classes of stock,
other than holders of the Series M Preferred Stock, a dividend at the rate of
six percent per annum of the Series N stated value. Upon any liquidation,
dissolution or winding up of the Company the holders of the shares of Series N
Convertible Preferred Stock shall rank senior to the holders of the Common
Stock, but junior to the holders of the Series M Preferred Stock, as to such
distributions, and shall be entitled to be paid an amount per share equal to the
Series N stated value plus any accrued and unpaid dividends (the "Liquidation
Preference"). Each of the Investors has the right, at its option at any time, to
convert any such shares of Series N Convertible Preferred Stock into such number
of fully paid and nonassessable whole shares of Common Stock as is obtained by
multiplying the number of shares of Series N Convertible Preferred Stock so to
be converted by the Liquidation Preference per share and dividing the result by
the conversion price of $3.685 per share subject to certain adjustments. The
approval of Investors holding at least 62.5% of the outstanding shares of the
Series N Convertible Preferred Stock is required for certain significant
corporate actions, including mergers and sales of substantially all of the
Company's assets.
Sale of Ottawa, Ontario Operations - On April 29, 2005 the Company sold its
Ottawa, Ontario operations, and certain assets, to its respective senior
management for approximately $280,000. As the sale included assets which were
pledged as security when the Company executed and delivered a guarantee dated
January 25, 2002 to Fleet to guarantee the indebtedness, liabilities and
obligations of certain borrowers a partial release was required from Fleet as a
condition of sale. Fleet granted such partial release in contemplation of the
sale, requiring that net proceeds be remitted to apply against loans outstanding
under the revolving credit facility. Remittance of proceeds was made direct to
Fleet by the Purchaser coincidental with the close of the transaction. Gross
revenues for the Ottawa operation approximate $3.0 million annually and the
impact on the Company's Results from Operations is diminimus.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
VELOCITY EXPRESS CORPORATION AND SUBSIDIARIES
In accordance with the "Safe Harbor" Provisions of the Private Securities
Litigation Reform Act of 1995, the Company notes that certain statements in this
Form 10-Q 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. When used herein, the words "believe," "plan,"
"continue," "hope," "estimate," "project," "intend," "expect," and similar
expressions are intended to identify such forward-looking statements. Although
the Company believes that the expectations reflected in such forward-looking
statements are based on reasonable assumptions, no statements contained in this
Form 10-Q should be relied upon as predictions of future events. Such statements
are necessarily dependent on assumptions, data or methods that may be incorrect
or imprecise and may be incapable of being realized. The risks and uncertainties
inherent in these forward-looking statements could cause results to differ
materially from those expressed in or implied by these statements.
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-Q 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.
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.
15
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 for the nine months ended April 2, 2005 and March
27, 2004 are as follows:
Nine months ended
------------------------------
April 2, 2005 March 27, 2004
------------- --------------
Commercial & office products 40.3% 38.5%
Financial services 27.2% 28.7%
Healthcare 19.1% 19.3%
Transportation & logistics 7.4% 4.9%
Energy 4.6% 5.2%
Technology 1.4% 3.4%
The Company had net loss of $28.6 million for the nine months ended April
5, 2005, including a net loss of $13.2 million for the three months then ended,
which resulted in cash used in operating activities for the nine months of $32.6
million. In fiscal 2005, the Company has financed this operating cash flow
deficit through net proceeds of $40 million from the issuance of preferred
stock. The Company's ability to generate sufficient capital resources for its
liquidity needs depends on its ability to substantially reduce its net loss.
Although the Company has begun several initiatives to control costs, declines in
revenue and increased operating expenses have resulted in an increased net loss
during the most recent fiscal quarter.
With the enactment of the Federal Law known as Check 21, on October 28,
2004, the Company anticipates continued reduction in financial services revenue
as financial institutions will now electronically scan and process checks,
without the required need to expedite movement of the physical documents to the
clearing institution. In response to this reduction in revenue, the Company will
focus on growing Healthcare and Healthcare-related services industries within
the United States, and will seek to effectively capitalize on this national
growth industry.
During the remainder of fiscal 2005, the Company plans to continue to
invest in automated technologies that will provide more economical delivery
routing, enhance and automate package tracking, and increase 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 its variable operating costs. 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.
During the last quarter of fiscal 2005, the Company intends to continue to
aggressively focus its efforts on positive cash flow and continue improved
operating performance. These activities include, but are not limited to,
restructing of its operations, 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 continues to require third party financing to meet its
liquidity requirements. On April 28, 2005 the Company entered into a Stock
Agreement, pursuant to which the Company sold 2,544,097 shares of Series N
Preferred to investors for $3.685 per share for net proceeds of approximately
$9.375 million.
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 will represent a risk.
As part of the Company's fiscal 2004 year-end closing, expenses were
identified which may have had 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 for the underlying weaknesses
have been identified, and annual fiscal results are fairly stated.
Historical Results of Operations
Revenue for the quarter ended April 2, 2005 decreased $1.8 million or 2.7%
to $66.1 million from $68.0 million for the quarter ended March 27, 2004. The
decrease in revenue for the quarter ended April 2, 2005 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 $10.3 million. This decline was offset by
revenue growth during the quarter from new customer contracts and expansion
within existing customers of approximately $8.5 million.
Revenue for the nine months ended April 2, 2005 decreased $16.3 million or
7.6 % to $199.6 million from $215.9 million for the nine months ended March 27,
2004. The decrease in revenue for the nine months ended April 2, 2005 compared
to the same period last year is related to lower volume experienced as a result
of
16
customer attrition, revenue loss associated with pricing pressure, and customer
freight volume fluctuations of approximately $36.3 million. This decline was
offset by revenue growth during the nine month period from new customer
contracts and expansion within existing customers of approximately $20.0
million.
Cost of services for the quarter ended April 2, 2005 was $54.1 million, a
decrease of $2.4 million or 4.3% from $56.5 million for the quarter ended March
27, 2004. The reduction in cost was in part a result of decreased business
volumes, which accounted for a reduction of $1.6 million in driver and personnel
costs. In addition costs were reduced as the result of moving from employee
drivers to independent contractors, which resulted in savings of $1.1 million in
insurance and $0.5 million in vehicle costs. Increased warehouse labor and other
costs associated with increased revenue from the office products sector resulted
in an increase in costs of $0.8 million. As a result, gross margin increased
from 16.9% in the prior year period to 18.2% for the quarter ended April 2,
2005. The Company continues to focus on managing costs and has developed systems
to more accurately manage driver pay in response to revenue volume changes.
Although gross margins improved in the current quarter, benefits from these new
systems are not very apparent in the results of operations.
Cost of services for the nine months ended April 2, 2005 was $163.2
million, a decrease of $12.2 million or 7.0% from $175.4 million for the nine
months ended March 27, 2004. The reduction in cost is a result of decreased
business volumes, which accounted for a reduction of $13.0 million in driver and
personnel costs, partially offset by cost increases of $0.8 million, which are
primarily increased warehouse labor. As a result, gross margin declined from
18.8% in the prior year nine month period to 18.2% for the nine months ended
April 2, 2005.
Selling, general and administrative ("SG&A") expenses for the quarter ended
April 2, 2005 were $19.9 million or 30.0% of revenue, a increase of $2.9 million
or 5.1% as compared with $16.9 million or 24.9% of revenue for the quarter ended
March 27, 2004. The company took a $0.6 million charge in the quarter associated
with the termination of approximately 200 employees. In addition, the increased
SG&A was comprised of $1.2 million in additional legal, audit and other outside
services, $0.9 million in increased bad debt expense, and $0.3 million in
increased compensation.
SG&A expenses for the nine months ended April 2, 2005 were $51.1 million or
25.6% of revenue, an increase of $3.1 million compared with $48.0 million or
22.2% of revenue for the nine months ended March 27, 2004. The primary increases
were personnel costs of $2.6 million, and legal fees of $1.5 million, offset by
a decline in bad debt expense of $1.9 million.
Occupancy charges for the quarter ended April 2, 2005 were $3.6 million,
unchanged from the quarter ended March 27, 2004.
Occupancy charges for the nine months ended April 2, 2005 were $10.7
million, an increase of $0.6 million or 5.6% from $10.1 million for the nine
months ended March 27, 2004. Increases in building repairs and maintenance were
$0.3 million and utilities were $0.2 million.
Interest expense for the quarter ended April 2, 2005 increased $1.3 million
to $2.0 million from $0.7 million for the quarter ended March 27, 2004. The
increase in interest expense is related to an increase of amortization of
deferred financing fees of $0.9 million and the Company's higher average
borrowings.
Interest expense for the nine months ended April 2, was unchanged for the
nine months ended March 27, 2004. A decrease in interest expense related to the
Company's lower average borrowings was offset by an increase in amortization of
deferred financing fees.
As a result of the foregoing factors, the net loss for the quarter ended
April 2, 2005 was $13.2 million, compared with $9.8 million for the same period
in fiscal 2004, an unfavorable change of $3.4 million. Net loss for the nine
months ended April 2, 2005 was $28.6 million, compared with $21.2 million for
the same period in fiscal 2004, an unfavorable change of $7.4 million.
As a result of the foregoing factors and beneficial conversion features of
$23.1 million (Series M Preferred) the net loss applicable to common
shareholders, for the quarter ended April 2, 2005 was $36.3 million, compared
with a net loss applicable to common shareholders of $9.8 million for the same
period in fiscal 2004, an unfavorable change of $26.5 million.
17
As a result of the foregoing factors and a beneficial conversion feature of
$52.2 million (Series J Preferred - $7.3 million; Series K Preferred - $14.8
million; Series L Preferred - $7.0 million; Series M Preferred - $23.1 million)
the net loss applicable to common shareholders, for the nine months ended April
2, 2005 was $80.8 million, compared with a net loss applicable to common
shareholders of $46.4 million for the same period in fiscal 2004, a decline of
$34.4 million.
Liquidity and Capital Resources
Cash used in operations was $32.6 million for the first nine months of
fiscal 2005 which includes a net loss of $28.6 million and $11.3 million of
working capital changes. Cash used from the decrease in accounts payable was
approximately $5.8 million as a result of vendor demand for pay down of aged
account balances. Accounts receivable required approximately $1.2 million as a
result of lower collections. The remaining use of working capital of $ 4.3
million was due to funding of insurance, legal and other miscellaneous claims.
Cash used as a result of investing activities was $2.2 million for the
first nine months of fiscal 2005 and consisted primarily of capital expenditures
for the Company's continued implementation of the customer-driven technology
solutions initiative. The Company's customer-driven technology solutions
initiative is comprised mainly of two elements: (i) smart package tracking
technology which will provide 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.
Cash provided as a result of financing activities amounted to $39.4 million
during first nine months of fiscal 2005. The primary source of cash was from
issuance of preferred stock, net of subscription receivables which provided
$44.3 million, which is offset by debt financing fees of $4.2 million. Net
payments on the revolving credit facility used $0.3 million of cash.
As of April 2, 2005, the Company had no outstanding purchase commitments
for capital improvements.
The Company reported a loss from operations of approximately $25.4 million
for the first nine months of fiscal 2005 and has negative working capital of
approximately $25.4 million at April 2, 2005.
On June 30, 2004, the Company's Board of Directors authorized the sale of
up to $25.0 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 was subject to shareholder approval and was non-voting unless
converted into common stock. Additionally, shareholder approval was 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. THLPV
and MCG Global, who control a majority of the shares, voted for such approvals.
The initial conversion price of the Series K Preferred was $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 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 and at that time recognized an additional charge against net loss
available to common shareholders of $3.9 million to reflect the beneficial
conversion.
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 Company entered into a Stock
Purchase Agreement on December 21, 2004, pursuant to which the Company sold,
pending shareholder approval, 7,000,000 shares of Series L Preferred to
investors for $1.00 per share for net
18
proceeds of approximately $7.0 million. The issuance of the Series L Preferred
was subject to shareholder approval and was non-voting unless converted into
common stock. Additionally, shareholder approval was 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. THLPV and
MCG Global, who control a majority of the shares, voted for such
approvals. The conversion price of the Series L Preferred was $0.10 per common
share, and, at the time the stock purchase agreements were executed, assuming
that the Series L Preferred were issued and convertible then, each share of
Series L Preferred was 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 contained a beneficial conversion amounting to $7.0 million which was
recognized as a deemed dividend to preferred shareholders at the time of the
sale and a charge against net loss available to common shareholders.
On December 21, 2004, the Company signed a purchase agreement to raise
approximately $21.0 million of new equity capital investment. The investment was
initially in the form of a convertible note that automatically converts into
Series M Convertible Preferred Stock ("Series M Preferred") upon approval of the
transaction by the Company's shareholders. The proceeds are being used for
general working capital needs consistent with financial budgets approved from
time to time by the Company's Board of Directors. The Series M Preferred accrues
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% per annum. 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 Series
M Preferred will be entitled to a preference on liquidation equal to one times
(1x) the original purchase price of the Series M Preferred 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.
Under the Purchase Agreement, the Company may also sell up to an additional
$2,000,000 in principal amount of the Notes ("Additional Notes") under the terms
of the Purchase Agreement for up to 30 days after the December 21, 2004
("Additional Note Sale Period"). By January 27, 2005, all of the Investors have
consented to extending the Additional Note Sale Period until January 31, 2005.
However, the Purchase Agreement was not formally amended. The Company sold an
additional $1,910,000 in principal amount of the Additional Notes on January 31,
2005 in a private placement to certain holders of its Preferred Stock. Mr.
Alexander Paluch, a member of the Company's Board of Directors, purchased
$40,000 of the Additional Notes and East River II, LP, an investment fund for
which Mr. Paluch serves as a General Partner, purchased $250,000 of the
Additional Notes in this offering.
Subsequent to formal shareholder approval at the shareholders' meeting held
on February 14, 2005 in Connecticut, the amounts of the total Series M Preferred
investment, plus accrued dividends, less related unamortized debt issue costs,
$22.9 million, $0.2 million, and $1.0 million, respectively, were reclassified
on the Company's balance sheet as components of shareholders' equity. The Series
M Preferred is deemed to contain a beneficial conversion amounting to $23.1
million which was recognized as a charge against net loss available to common
shareholders at the time that the notes converted to equity.
Management believes the investment will provide the Company with sufficient
working capital resources to provide for the anticipated liquidity needs for the
remainder of 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 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 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
19
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 recorded $2.3 million as a deferred financing cost.
In each instance of security sale, it is of the opinion of the Company that
the offering is fair, from a financial point of view, to the shareholders other
than the investor group. Such opinion is supported by a fairness opinion
obtained by the Company.
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% (7.25% at April 2, 2005), or, at the Company's
election, at LIBOR plus 3.25%. As of April 2, 2005, the Company has 34.17% of
the facility usage under LIBOR contracts at an interest rate of 6.13%. 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 also
maintains a $6.0 million senior subordinated note with interest payable
quarterly at 15% per annum (to be reduced to 12% upon the occurrence of certain
events), with a quarterly principal repayment schedule, subject to approval by
the primary lender, commencing January 2005 terminating with a final payment at
October 31, 2007. To date the primary lender has not provided approval.
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, 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, July 1, 2004 and December 21, 2004, the Company entered
into the third, fourth and fifth 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.
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 were 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.
20
At April 2, 2005, the Company was in violation of certain non-financial
affirmative covenants under the revolving credit facility and its senior
subordinated debt facility with respect to furnishing financial statements on a
timely basis to the respective lenders.
On April 28, 2005 the Company entered into a Stock Agreement, pursuant to
which the Company sold 2,544,097 shares of Series N Preferred to investors for
$3.685 per share for net proceeds of approximately $9.375 million.
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.
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. 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 April 2, 2005, 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 $5 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
21
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.
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
As part of the Company's fiscal year-end 2004 closing, expenses were
identified that may have had 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 access 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 2004 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 2004 results were fairly
stated. Therefore, the Company can not definitively ascertain that these
adjustments would not have materially impacted the first three quarters of
fiscal 2004 results, which are reported herein.
As noted in ITEM 4 CONTROLS AND PROCEDURES, during this 3rd quarter of the
current fiscal year the Company has taken steps to correct and mitigate the
material weaknesses that could have an adverse
22
impact on the Company's business and financial reporting. In the absence of full
implementation, however, material weaknesses still exist.
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.
ITEM 3. 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 $29.3 million at April 2, 2005. If
the entire revolving credit facility were subject to a one percentage point
change in the borrowing rate, the corresponding annualized effect on interest
expense would be $0.3 million.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, under the supervision
and with the participation of the Company's management, including the Company's
Chief Executive Officer (CEO) and Chief Financial Officer (CFO) (the "Certifying
Officers"), the Company carried out an evaluation of the effectiveness of its
"disclosure controls and procedures" (as the term is defined in the Securities
Exchange Act of 1934, as amended (the "Act") Rules 13a-15(e) and 15d-15(e) to
mean controls and other procedures of an issuer that are designed to ensure that
information required to be disclosed by the issuer in the reports it files or
submits under the Act is recorded, processed, summarized and reported, within
the time periods specified in the Commission's rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by the Company in
the reports that it files or submits under the Act is accumulated and
communicated to the issuer's management, including the Certifying Officers, to
allow timely decisions regarding required disclosure).
As reported in Form 10-Q, under "ITEM 4. Controls and Procedures", for the
fiscal quarter ended January 1, 2005 certain significant deficiencies were
evident to management that, in the aggregate, represented 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.
Based on this evaluation, the Certifying Officers concluded that the Company's
disclosure controls and procedures were not effective to ensure that material
information was recorded, processed, summarized and reported by management of
the Company on a timely basis in order to comply with the Company's disclosure
obligations under the Securities Exchange Act of 1934, as amended, and the rules
and regulations promulgated thereunder.
For the quarterly reporting period ended April 2, 2005 management has again
evaluated the effectiveness of the design and operations of disclosure controls
and procedures; and the Certifying Officers have concluded that the Company's
disclosure controls and procedures are substantially improved as to ensure that
material information was recorded, processed, summarized and reported on a
timely basis relative to Accounts Payable and Cash Accounts cutoff,
authorization, data analysis and documentation in order to comply with the
Company's disclosure obligations under the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder. As to the
implementation and effectiveness of
23
disclosure controls and procedures relatives to the reconciliation of accounts
the Certifying Officers' evaluation continues to indicate the existence of
material weakness; and therefore not in compliance with the Company's disclosure
obligations under the aforementioned rules and regulations.
(b) Changes in internal controls over financial reporting
At the direction of the Audit Committee, the Company proceeded with its
plans to enhance its internal controls and procedures, which it believes address
each of the previously defined deficiencies and weaknesses. The Company has
substantially augmented its financial and control expertise by the naming of a
Chief Financial Officer, and the addition of a Corporate Controller, to provide
hands-on oversight of the monthly financial closing, data analysis, account
reconciliation and cutoff. The Company has also restructured its Finance Group
to establish day to day process oversight, stronger cutoff & authorization
controls, and operating efficiencies. In addition, the Company has designated
specialists in this group to identify operating problems and spearhead
resolution. Further, the Company has moved to purge inactive accounts from its
files 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. The
Company believes that the corrective steps described herein will enable
management to conclude that the internal controls over its financial reporting
are effective when they are fully implemented. The Company will continue its
efforts to identify assess and correct any additional weaknesses in internal
control.
PART II
ITEM 1. 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
involve 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.
24
. 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Item 1.01. Entry into a Material Definitive Agreement.
Sale of Series M Preferred Stock
On December 21, 2004, Velocity Express Corporation, a Delaware corporation
(the "Company"), entered into a Purchase Agreement (the "Purchase Agreement")
with certain institutional and accredited investors (the "Investors"). Under the
Purchase Agreement, the Company issued on December 21, 2004, 6% Convertible
Notes (the "Notes") in the aggregate principal amount of $21,000,000, which will
be convertible into Series M Preferred Stock of the Company upon stockholder
approval of an increase in the Company's authorized share capital, a reverse
stock split of the Company's Common Stock and certain other matters. Under the
Purchase Agreement, the Company may also sell up to an additional $2,000,000 in
principal amount of the Notes ("Additional Notes") under the terms of the
Purchase Agreement for up to 30 days after the December 21, 2004 ("Additional
Note Sale Period"). By January 27, 2005, all of the Investors have consented to
extending the Additional Note Sale Period until January 31, 2005. However, the
Purchase Agreement was not formally amended. The Company sold an additional
$1,910,000 in principal amount of the Additional Notes on January 31, 2005, in a
private placement to certain holders of its Preferred Stock. Mr. Alex Paluch,
one of our directors, purchased $40,000 of the Additional Notes and East River
II, LP, an investment fund for which Mr. Paluch serves as General Partner,
purchased $250,000 of the Additional Notes in this offering.
The Additional Notes have exactly the same terms as the Notes bearing
interest at a rate equal to 6.0% per annum and were to mature and become due and
payable on the earlier of (i) April 30, 2005 or (ii) the date on which the
Company's stockholder vote not to approve the conversion of the Notes and
Additional Notes into Series M Preferred. The Additional Notes were not to be
repaid by the Company prior to maturity. Upon a Change of Control (as defined in
the Additional Notes), the Company must repurchase the Additional Notes at the
option of each holder. The Additional Notes were convertible automatically into
shares of Series M Preferred Stock upon stockholder approval of the transaction
pursuant to the Purchase Agreement and certain other matters. The conversion
price per share for the Additional Notes equals $0.0737 multiplied by a
fraction, the numerator of which is the number of shares of the Company's Common
Stock, on a fully-diluted basis (including Common Stock and debt, preferred
stock, rights options and warrants convertible into or exchangeable for Common
Stock (but excluding options or warrants with an exercise price of $0.51 per
share or more)) existing on December 21, 2005, and the denominator of which is
the number of shares of the Company's Common Stock on a fully-diluted basis
existing as of the conversion date. Any fractional shares of Series M Preferred
resulting from this conversion shall be cashed and no fractional share of Series
M Preferred shall be issued. Upon the occurrence of an "Event of Default," as
defined in the Additional Notes, all unpaid principal and accrued interest under
the Additional Notes shall automatically become immediately due and payable if
the Event of Default is triggered by the Company becoming bankrupt or insolvent.
If the Event of Default is triggered by reasons other than the Company becoming
bankrupt or insolvent, all unpaid principal and accrued interest under the
Additional Notes shall become immediately due and payable upon the election of
the holders of the Additional Notes.
Warrant to Purchase Common Stock - As part of the Series M Preferred
private placement, THLPV agreed to extend for a two-year period the July 1, 2004
capital contribution agreement previously entered into between THLPV and the
Company's lenders in support of the Company's revolving credit facility. 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-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 which granted on February 14, 2005, a warrant to
purchase 9,677,553 pre-reverse stock split shares of common stock. The term of
the warrant will be five years, and the warrant will have an exercise price of
$0.0001 per share. Due to the pricing of the warrant, the Company recorded $2.3
million as a deferred financing cost.
Conversion of Preferred Shares to Common - Consistent with the terms of the
Series M Convertible Preferred Stock offering ratification at the annual
shareholders' meeting held on February 14, 2005, and amendment of the Company's
charter, all shareholders of previously issued Preferred Series B through L
automatically converted their shares of preferred stock to common stock.
Reverse Stock Split - Pursuant to the Company's discussions with the
NASDAQ, shareholder approval was granted for a 1:50 reverse stock split at the
annual shareholders' meeting held on February 14, 2005. Such reverse stock split
became effective with the trading of shares on February 16, 2005.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
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 defaults existing at that time 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.
At April 2, 2005, the Company was in violation of certain non-financial
affirmative covenants under the revolving credit facility and its senior
subordinated debt facility with respect to furnishing financial statements on a
timely basis to the respective lenders.
25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On February 14, 2005 at its annual meeting of shareholders, the Company
submitted to its shareholders twenty matters, all of which were approved. The
matters and voting thereon were as follows:
1. To elect six directors for the ensuing year and until their successors
are elected and duly qualified.
For Withhold Authority
---------- ------------------
Vincent A. Wasik 97,219,692 59,280
Alexander I. Paluch 97,223,832 55,140
Richard A. Kassar 97,223,832 55,140
Leslie E. Grodd 97,228,832 50,140
John J. Perkins 97,223,832 55,140
James G. Brown 21,320,266 --
2. To ratify the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending July 2, 2005.
For 97,262,722 Against 4,000
Abstain 12,250 Broker non-votes --
3. To approve an amendment to the Company's Amended and Restated
Certificate of Incorporation to increase the number of shares of the
Company's authorized capital to 999,515,270 shares, of which
654,276,115 shares shall be common stock, $0.004 par value per share
and 345,239,155 shares shall be preferred stock.
For 97,261,482 Against 5,240
Abstain 12,250 Broker non-votes --
4. To approve the issuance of our Series I Convertible Preferred Stock.
For 97,261,462 Against 5,260
Abstain 12,250 Broker non-votes --
5. To approve the anticipated amendment to the certificate of designation
of our Series I Convertible Preferred Stock.
For 97,261,462 Against 5,260
Abstain 12,250 Broker non-votes --
6. To approve the issuance of our Series J Convertible Preferred Stock.
For 97,261,462 Against 5,260
Abstain 12,250 Broker non-votes --
7. To approve the anticipated amendment to the certificate of designation
of our Series J Convertible Preferred Stock.
For 97,261,462 Against 5,260
Abstain 12,250 Broker non-votes --
8. To approve the issuance of our Series K Convertible Preferred Stock.
For 97,260,462 Against 5,260
Abstain 13,250 Broker non-votes --
26
9. To approve the anticipated amendment to the certificate of designation
of our Series K Convertible Preferred Stock.
For 97,255,462 Against 10,260
Abstain 13,250 Broker non-votes --
10. To approve the issuance of our Series L Convertible Preferred Stock
and ratify the loan of $7 million by THLPV L.P. and its affiliates to
the Company.
For 97,260,462 Against 5,260
Abstain 13,250 Broker non-votes --
11. To approve the issuance of a warrant to purchase 9,677,553 shares of
Common Stock, at an exercise price of $0.0001 per share, to THLPV L.P.
and its affiliates in return for its agreement to extend its
obligations under the Capital Contribution Agreement, dated July 1,
2004, for a period of two years.
For 97,260,462 Against 6,260
Abstain 12,250 Broker non-votes --
12. To approve the issuance of our Series M Convertible Preferred Stock,
$0.004 par value per share and the issuance of a warrant to TerraNova
Capital for 4,882,174 shares of Series M Preferred and ratify the
issuance of the 6% Convertible Note, issued on December 21, 2004, for
$21 million.
For 97,260,462 Against 6,260
Abstain 12,250 Broker non-votes --
13. To approve the issuance of 1,106,663 warrants as bonuses to certain
executive officers.
For 97,067,309 Against 199,393
Abstain 12,270 Broker non-votes --
14. To approve the issuance of 1,766,664 warrants to certain contractors
of the Company.
For 97,055,309 Against 211,393
Abstain 12,270 Broker non-votes --
15. To effect a reverse stock split of the Company's outstanding Common
Stock whereby the Company will issue one new share of Common Stock for
50 shares of the Company's Common Stock.
For 97,211,062 Against 55,660
Abstain 12,250 Broker non-votes --
16. To approve amending the certificate of incorporation of the Company to
provide for mandatory conversion into Common Stock of each series of
our outstanding preferred stock upon conversion of 100% of Series B
Preferred Stock into Common Stock.
For 97,238,959 Against 27,763
Abstain 12,250 Broker non-votes --
17. To approve amending the Certificate of Incorporation to provide that
the issuance of the Series M Preferred, the Additional Series M Notes,
the Series M Preferred issued upon conversion of the Additional Series
M Notes, the TerraNova Warrant or the Series M Preferred issued upon
exercise of the TerraNova warrant shall not have any anti-dilution
effect on any series of the Company's outstanding Preferred Stock.
27
For 97,256,562 Against 5,160
Abstain 17,250 Broker non-votes --
18. To approve the issuance of 513,763,445 shares of Common Stock to THLPV
L.P. and its affiliates upon the conversion of all of the preferred
stock held by THLPV L.P. and its affiliates.
For 97,260,462 Against 5,260
Abstain 13,250 Broker non-votes --
19. To approve the amendment to the Company's certificate of incorporation
to permit the Company's stockholders to take action by written consent
in lieu of a meeting.
For 97,254,502 Against 12,220
Abstain 12,250 Broker non-votes --
20. To approve the Company's 2004 Stock Incentive Plan.
For 97,055,329 Against 211,393
Abstain 12,250 Broker non-votes --
ITEM 5. OTHER INFORMATION.
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits required by Item 601 of Regulation S-K:
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
b. Reports on Form 8-K
28
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned; thereunto
duly authorized, in the Town of Westport, State of Connecticut on May 17, 2005.
VELOCITY EXPRESS CORPORATION.
By /s/ Vincent A. Wasik
--------------------------
Vincent A. Wasik
Chief Executive Officer
By /s/ Daniel R. DeFazio
--------------------------
Daniel R. DeFazio
Chief Financial Officer
29