U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______ .
Commission File No. 0-27780
UNITED SHIPPING & TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
UTAH 87-0355929
------------------------------- ---------------------------------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
9850 51ST AVENUE NORTH, SUITE 110, MINNEAPOLIS, MN 55442
--------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (612) 941-4080
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
As of October 24, 2000, there were 16,628,199 shares of common stock of the
registrant issued and outstanding.
Transitional Small Business Disclosure.
YES [ ] NO [X]
<PAGE>
UNITED SHIPPING & TECHNOLOGY, INC.
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
Page
----
PART I. FINANCIAL INFORMATION.............................................. 3
ITEM 1.
a) Consolidated Balance Sheets-September 30, 2000 and July 1, 2000.... 3
b) Consolidated Statements of Operations-
Three months ended September 30, 2000 and October 2, 1999.......... 4
c) Consolidated Statement of Shareholders' Deficit-September 30, 2000. 5
d) Consolidated Statements of Cash Flows
Three months ended September 30, 2000 and October 2, 1999.......... 6
e) Notes to Consolidated Financial Statements......................... 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................... 11
PART II. OTHER INFORMATION.................................................. 13
ITEM 1. Legal Proceedings.................................................. 13
ITEM 2. Changes in Securities and Use of Proceeds.......................... 14
ITEM 3. Defaults upon Senior Securities.................................... 15
ITEM 4. Submission of Matters to a Vote of Securities Holders.............. 15
ITEM 5. Other Information.................................................. 15
ITEM 6. Exhibits........................................................... 15
SIGNATURES.................................................................. 16
EXHIBIT INDEX............................................................... 17
2
<PAGE>
PART I.
UNITED SHIPPING & TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands)
<TABLE>
<CAPTION>
September 30, July 1,
2000 2000
--------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 1,805 $ 3,993
Accounts receivable, net of allowance for doubtful accounts 65,079 57,698
Accounts receivable - other 2,700 3,960
Prepaid expense 9,165 9,213
Inventories 1,045 1,109
Other current assets 250 163
--------- ---------
Total current assets 80,044 76,136
Property and equipment:
Land 488 488
Buildings and leasehold improvements 1,909 1,863
Furniture, equipment and vehicles 16,203 15,340
--------- ---------
18,600 17,691
Less: accumulated depreciation (6,538) (4,895)
--------- ---------
12,062 12,796
Goodwill 87,677 89,220
Notes receivable from related party 1,221 1,354
Other assets, net 2,310 2,217
--------- ---------
Total assets $ 183,314 $ 181,723
========= =========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Trade accounts payable $ 29,601 $ 30,792
Accrued insurance and claims 18,735 18,903
Accrued wages and benefits 7,128 9,020
Accrued legal and claims 11,313 16,192
Other accrued liabilities 13,844 12,669
Current portion of long-term debt and capital leases 6,338 7,167
--------- ---------
Total current liabilities 86,959 94,743
Long-term debt and capital leases 44,229 39,495
Accrued insurance and claims 22,192 23,347
Series B redeemable preferred stock 20,986 25,261
Series C redeemable preferred stock 12,000 --
Preferred stock Series C warrants 3,540 --
Shareholders' deficit:
Common stock, $0.004 par value, 16,628 and 16,400 shares
issued and outstanding on September 30, 2000 and July 1, 2000
respectively 66 65
Common stock warrant 455 --
Additional paid-in capital 46,904 43,240
Accumulated deficit (53,962) (44,387)
Foreign currency translation (55) (41)
--------- ---------
Total shareholders' deficit (6,592) (1,123)
--------- ---------
Total liabilities and shareholders' deficit $ 183,314 $ 181,723
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
<PAGE>
UNITED SHIPPING & TECHNOLOGY, INC. AND SUBSIDIARIES
(UNAUDITED)
(Amounts in thousands, except per share data)
Quarter Ended
-------------
September 30, October 2,
2000 1999
------------ ------------
Revenue $ 133,091 $ 53,724
Cost of services 108,820 42,439
------------ ------------
Gross profit 24,271 11,285
Operating expenses:
General and administrative 25,636 10,709
Sales and marketing 4,170 2,055
------------ ------------
Loss from operations (5,535) (1,479)
Other income(expense)
Net interest expense (1,617) (137)
Other expense (33) --
------------ ------------
Net loss $ (7,185) $ (1,616)
============ ============
Net loss applicable to common shareholders $ (9,575) $ (1,616)
============ ============
Basic and diluted net loss per share $ (0.58) $ (0.15)
============ ============
Basic and diluted weighted average number
of common shares outstanding 16,529,020 11,027,010
============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
4
<PAGE>
UNITED SHIPPING & TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' (Deficit) Equity
(UNAUDITED)
(Amounts in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Stock Paid-in Accumulated Comprehensive
Shares Amount Capital Deficit Loss Total
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 1, 2000 $ 16,400 $ 65 $ 43,240 $(44,387) $ (41) $ (1,123)
Value of preferred stock conversion
feature -- -- 2,670 (2,390) -- 280
Stock options exercixed 35 -- 156 -- -- 156
Common stock warrant -- -- 455 -- -- 455
Warrants exercised 93 1 288 -- -- 289
Issuance of stock in lieu of
litigation settlement 100 -- 550 -- -- 550
Net loss -- -- -- (7,185) -- (7,185)
Foreign currency translation -- -- -- -- (14) (14)
---------
Comprehensive loss (7,199)
----------------------------------------------------------------------------
Balance at September 30, 2000 $ 16,628 $ 66 $ 47,359 $(53,962) $ (55) $ (6,592)
============================================================================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
<PAGE>
UNITED SHIPPING & TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(UNAUDITED)
(Amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended
September 30, October 2,
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss $ (7,185) $ (1,616)
Adjustments to reconcile net loss to net cash flows used in
operating activities:
Depreciation and amortization 3,029 737
Other 147 --
(Gain)/Loss on retirement of equipment 25 (118)
Change in operating assets and liabilities:
Accounts receivable (7,380) (4,591)
Other current assets 1,332 1,299
Other assets 147 (304)
Accounts payable (1,184) 3,111
Accrued liabilities and deferred revenue (7,416) 1,194
-----------------------
Cash used in operating activities (18,485) (288)
-----------------------
INVESTING ACTIVITIES
Proceeds from sale of equipment 27 172
Purchases of property and equipment (704) (373)
Acquisition of business, net of cash received -- (55,065)
Other, net 18 --
-----------------------
Cash used in investing activities (659) (55,266)
-----------------------
FINANCING ACTIVITIES
Payments on notes payable and long-term debt (57,615) (13,671)
Proceeds from notes payable and long-term debt 61,591 71,610
Proceeds from the sale of preferred stock 12,000 --
Proceeds from sale of common stock 944 1,433
-----------------------
Cash provided by financing activities 16,970 59,372
-----------------------
Effect of currency exchange rate changes on cash (14) 14
-----------------------
Net (decrease) increase in cash and cash equivalents (2,188) 3,832
Cash and cash equivalents, beginning of period 3,993 252
-----------------------
Cash and cash equivalents, end of period 1,805 4,084
=======================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 679 $ 84
=======================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
6
<PAGE>
UNITED SHIPPING & TECHNOLOGY, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements included herein have been
prepared by United Shipping & Technology, Inc. which, together with its
wholly-owned subsidiaries, shall be referred to herein as the "Company," without
audit, 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 September 30, 2000, and the results of its operations for
the three months ended September 30, 2000, and its cash flows for the three
months ended September 30, 2000 have been included. Certain information in
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have 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 1, 2000, and
the footnotes thereto, included in the Company's Report on Form 10-KSB, filed
with the Securities and Exchange Commission.
1. Basis of Presentation:
Principles of Consolidation - The consolidated financial statements
include the accounts of United Shipping & Technology, Inc. and its wholly-owned
subsidiaries. All inter-company balances and transactions have been eliminated
in the consolidation.
Certain reclassifications have been made to prior years' consolidated
financial statements to conform to the current year presentation.
2. Revenue Recognition:
Revenue from the same-day delivery services is recognized when services
are rendered to customers.
3. Net Loss Per Share:
Basic net loss per share excludes dilution and is computed by dividing
net loss by the weighted average number of common shares outstanding for the
period. Diluted net loss per share reflects the potential dilution that could
occur if securities or other obligations to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company. For all periods presented, diluted
net loss per share is equal to basic net loss per share because the effect of
including such securities or obligations would have been antidilutive.
<TABLE>
<CAPTION>
Year ended
September 30, October 2,
2000 1999
------------ ------------
(AMOUNTS IN THOUSANDS EXCEPT PER
SHARE DATA)
Numerator:
<S> <C> <C>
Net Loss $ (7,185) $ (1,616)
Accretion of series B redeemable preferred stock to its redemption value (95) --
Adjustment to the market value of preferred stock series B warrants (2,295) --
------------------------------
Adjusted net loss applicable to common shareholders $ (9,575) $ (1,616)
==============================
Denominator for basic and diluted loss per share-
Weighted average shares 16,529,020 11,027,010
==============================
Basic and diluted loss per share $ (0.58) (0.15)
==============================
</TABLE>
7
<PAGE>
4. Comprehensive Loss:
Comprehensive loss was $7.2 million and $1.6 million for the three
months ended September 30, 2000 and October 2, 1999, respectively. The
difference between net loss and total comprehensive loss related to foreign
currency translation adjustments.
5. Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
6. Acquisitions:
Effective August 28, 1999, the Company acquired from CEX Holdings, Inc.
("CEX") all of the outstanding shares of common stock of Velocity Express, Inc.
("Velocity"), formerly known as Corporate Express Delivery Systems, Inc., a
provider of same day delivery solutions. The purchase price was approximately
$91.2 million, subject to adjustment as defined in the merger agreement. The
purchase price consisted of $43 million in cash provided by an institutional
debt financier and an investment firm, and $19.5 million in a combination of
short and long-term notes issued to CEX. The Company, as a result of the
acquisition, received approximately $86.6 million of Velocity's assets and
assumed approximately $115.3 million of Velocity's liabilities, which resulted
in the Company recognizing approximately $91.2 million in goodwill. The results
of Velocity's operations have been included in the Company's consolidated
financial statements since August 28, 1999.
The final purchase price adjustments have not been finalized with CEX.
The Company expects to complete adjustments to the allocation of the purchase
price in the second quarter of fiscal year 2001.
In connection with the August 28, 1999 acquisition of Velocity,
management implemented a plan to involuntarily terminate approximately 100
employees and to consolidate certain facilities. Approximately $3.9 million in
anticipated costs relating to such items was included in the acquisition cost
allocation. During the fourth quarter of fiscal 2000, the plan was finalized and
final adjustments of approximately $1.5 million were made to the acquisition
cost allocation. As of September 30, 2000 approximately $.6 million in costs
(primarily related to severance payments and lease terminations) were charged
against the reserve and no amounts related to such plan have been included in
the determination of net loss for the period.
The following represents the activity within these accruals (in
thousands):
Balance at July 1, 2000 $2,478
Additions -
Payments (598)
-------
Balance at September 30, 2000 $1,880
=======
In connection with the acquisition of Velocity, the Company incurred or
may incur fees for merger and acquisition related services totaling up to $5.0
million. These fees consist of $3.8 million upon the closing of the transaction
and possible contingent payments of up to $1.2 million. The contingent payments
are due in annual increments of $.6 million in fiscal years 2001 and 2002, upon
the Company achieving various revenue targets. The Company has paid the $3.8
million of fees that were due upon the closing. Given the nature of the
contingent portion of the agreement, the Company will recognize the expense
associated with the contingent payments if and at the time the revenue targets
are achieved. If the revenue targets are not achieved, the Company is not liable
for the contingent portion of the agreement.
The following unaudited pro forma financial information gives effect to
the Velocity acquisition as if it had occurred at the beginning of fiscal year
2000. The pro forma results were prepared for comparative purposes only and are
not indicative of the results of operations which actually would result had the
acquisition occurred on the date indicated, or which may result in the future.
8
<PAGE>
Three months ended
------------------
October 2, 1999
---------------
(Amounts in thousands)
Revenue $140,319
Loss from operations (8,078)
Net loss (9,225)
Basic and diluted loss per share (0.84)
7. Long-term Debt and Capital Leases:
Long-term debt and capital leases consisted of the following (amounts
in thousands):
September 30, July 1,
2000 2000
----------- ----------
Revolving note $ 26,402 $ 21,903
Senior subordinated note 3,662 3,577
Long-term subordinated note to CEX 6,519 6,519
Short-term subordinated note to CEX 4,404 4,404
Convertible subordinated note to CEX 3,600 3,600
9% convertible subordinated note 841 951
Equipment financing debt 5,025 5,471
Various other notes and leases 114 237
----------- ----------
50,567 46,662
Less current maturities (6,338) (7,167)
----------- ----------
Total $ 44,229 $ 39,495
=========== ==========
Borrowings under the revolving note are limited to the lesser of $55
million or an amount based on a defined portion of receivables less the amount
outstanding on the $5 million Swing Line Note issued to the institutional
financier. Interest is payable monthly at a rate of Prime plus 0.6% (10.1% at
September 30, 2000). The Company may elect the rate of LIBOR plus 3% at its
discretion from time to time. All amounts advanced are due September 23, 2004.
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 senior subordinated note has interest payable quarterly at 12% and
is due September 30, 2004. The note is subordinate to the revolving note. The
initial carrying value of the senior subordinated note was reduced by $1.7
million for the fair value of the common stock warrant issued to the senior
subordinated lender. The unamortized discount aggregated $1.33 million at
September 30, 2000. The discount is amortized over the life of the note. The
warrant has an exercise price of $3.021 per share and entitles the holder to
acquire, in whole or in part, 1,498,082 shares of the Company's common stock,
subject to adjustment for certain anti-dilution rights as defined in the warrant
purchase agreement.
As a result of the acquisition of Velocity, the Company was also liable
on a 6% convertible subordinated note which was due January 31, 2000. In March
2000, the Company made a principal payment in the amount of $.5 million plus
accrued interest and in April 2000, restructured the terms of the original
agreement into a 9% convertible subordinated note in the amount of $1.7 million.
Under the new agreement, the Company is required to pay principal and accrued
interest in an amount equal to $.2 million (or such lesser amount if less than
$.2 million of the unpaid principal and accrued interest outstanding)
commencing May 1, 2000 and continuing until all principal and interest is paid
or otherwise provided for. In connection with the new agreement, the Company
also issued a warrant to purchase 15,000 shares of common stock at an exercise
price of $12.925 per share. The Company recorded the fair value associated with
this warrant as a discount against the carrying value of the note. Under the new
agreement, the Holder has the option of converting all or a portion of the
outstanding principal and accrued interest thereon into common stock of the
Company. The number of shares receivable by the Holder upon each conversion is
equal to the outstanding principal and accrued interest being converted divided
by the average closing
9
<PAGE>
sale price of the Company's common stock for the 20 trading days preceding the
date of the Notice to Set Conversion Price delivered by the Holder to the
Company from time to time. Based upon the Holder's Notice to Set Conversion
Price dated September 29, 2000, the Holder upon conversion would have the right
to receive approximately 180,744 shares of common stock at a purchase price of
$4.653 per share. Under the new agreement, the Holder also has anti-dilution
protection and registration rights with respect to the shares receivable upon
conversion. In the event the registrable shares are not registered in the time
frame set forth in the new Agreement, the outstanding principal balance on the
Note is subject to increase as set forth therein.
Substantially all of the assets and operations of Velocity have been
pledged to secure borrowings under the revolving note, the senior subordinated
note and the CEX subordinated notes. The Company is subject to certain
restrictive covenants, the more significant of which include limitations on
dividends, loans and investments, capital expenditures, new indebtedness and
changes in capital structure. The Company is also required to maintain certain
financial covenants related to minimum EBITDA. The agreements with the lenders
also require the Company to obtain the consent of the lenders for additional
acquisitions.
8. Commitments and Contingencies:
The Company leases equipment, vehicles and buildings under various
non-cancelable operating and capital lease agreements with terms generally
ranging from three to ten years. Future minimum lease commitments under
non-cancelable leases at September 30, 2000 were approximately $40 million.
The Company is partially self-insured for automobile, workers'
compensation, and cargo claims. The Company has elected to retain a portion of
expected losses through the use of deductibles. Provisions for losses expected
under these programs are recorded based upon the Company's estimates of the
aggregate liability for claims incurred. These estimates include the Company's
actual experience based on information received from the Company's insurance
carriers and historical assumptions of development of unpaid liabilities over
time.
9. Equity:
In May 2000, the Company entered into an agreement to sell 2,806,797
shares of the Company's Series B Convertible Preferred Stock (the "Series B
Preferred") at a price of $9.00 per share for a total of approximately $25.3
million. The Series B Preferred requires the Company to redeem each outstanding
share at $9.00 per share, subject to adjustment, on May 31, 2006. The Company
agreed to issue with the Series B Preferred three warrants pending the approval
of the Company's shareholders. On August 14, 2000 at a special meeting of
shareholders the warrant issuance and exercise was approved. The terms of the
three warrants are as follows:
o A warrant to purchase the number of shares of Series B
Preferred equal to an aggregate of $30 million divided by the
45 day average closing sales price of the Company's common
stock immediately prior to the date of exercise. The fair value
of the preferred warrant was determined to be approximately
$3.3 million at the date of shareholder approval. The warrant
was cancelled upon the issuance of Series C Preferred as set
forth below.
o A warrant to purchase up to an aggregate of 452,901 shares of
Series B Preferred at an exercise price of $9.00 per share,
subject to adjustment in order to prevent dilution. The fair
value of this preferred warrant was determined to be
approximately $.6 million at the date of shareholder approval.
The warrant was cancelled upon the issuance of Series C
Preferred as set forth below.
o A warrant to purchase an aggregate of 425,000 shares of the
Company's common stock. The warrant becomes exercisable on a
pro rata basis in the event and to the extent that any of the
3,000,000 options granted under the Company's 2000 Stock Option
Plan are exercised. The exercise price is equal to the lowest
exercise price of the initially approved 2000 Plan options,
subject to adjustment to prevent dilution. The fair value of
the warrant was determined to be approximately $.5 million at
the date of shareholder approval. The warrant expires on May
31, 2004.
The fair value of the warrants issued with the Series B Preferred was
allocated from the carrying amount of the Series B Preferred to the respective
warrants at the August 14, 2000 measurement date. The Series B Preferred will be
accreted up to its redemption amount of $25.3 million. The shares of the Series
B Preferred are convertible into shares of the Company's common stock at a rate
of 1:1 subject to adjustment to prevent dilution. An adjustment of $2.3 million
was recorded in the first quarter to mark the Series B Preferred stock warrants
to market.
10
<PAGE>
The Company's Series B Preferred was deemed to have contained
beneficial conversion features that were recognized as a deemed dividend to
preferred shareholders. The value of the proceeds allocated to the beneficial
conversion feature was $3.5 million and was recognized as a return to the
preferred shareholders at the date of issuance since the Series B Preferred is
immediately convertible. This entry was reflected in the fiscal year 2000
financial statements.
In September 2000, the Company issued 2,000,000 shares of its Series C
Convertible Preferred Stock (the "Series C Preferred") at $6.00 per share for
total proceeds of approximately $12 million. The Series C Preferred is
convertible at any time at a price of $6.00, subject to adjustment in order to
prevent dilution. The Series C Preferred requires the Company to redeem each
outstanding share at $6.00 per share, subject to adjustment, on August 31, 2006.
In connection with the issuance of the Series C Preferred the Company issued
warrants to purchase 825,484 shares of Series C Preferred at an exercise price
of $.01 per share (the "Series C Warrants"). The fair value of the Series C
Warrants was determined to be approximately $3.5 million and was allocated from
the amount of the Series C Preferred Stock.
In exchange for the Series C Warrants, the Company canceled the
warrants to purchase Series B Preferred (the "Series B Warrants") issued in May
2000 and approved at a special meeting of the shareholders on August 14, 2000.
At the date of cancellation, the difference between the fair value of the Series
B Warrants and the fair value of the Series C Warrants was $2,670, and was
recorded as additional paid in capital.
In August 2000, pursuant to a settlement agreement dated June 20, 2000,
between the Company and a former employee, the Company issued 100,000 shares of
the Company's common stock in connection with the settlement of certain
litigation. These shares were placed in escrow pending the registration of the
shares or the earlier termination of the agreement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
UNITED SHIPPING & TECHNOLOGY, INC. AND SUBSIDIARIES
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
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-QSB 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-QSB 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-QSB 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-RECENT SIGNIFICANT ACQUISITION
With the acquisition of Velocity, the Company has become the leader in
nationwide customized delivery solutions for same-day, time-critical shipping
and distribution. The Company provides an array of same-day ground and air
delivery services, including scheduled delivery, on-demand delivery,
distribution services and air courier services. The Company's network consists
of approximately 210 locations in 86 of the top metropolitan areas in the United
States. The Company's operations are supported by a fleet of approximately 8,000
vehicles, including 3,700 company-leased or owned vehicles and 4,300 vehicles
utilized by independent contractors. The Company currently has approximately
7,100 employees.
11
<PAGE>
The purchase of Velocity was a key step in the Company meeting its goal
of becoming the premier same-day express delivery and e-commerce fulfillment
service in the United States. With the acquisition of Velocity, the Company now
provides the following products and services to individual consumers and
businesses:
* same-day ground and air transportation services throughout the United
States;
* distribution, logistics and supply chain management services;
* the ability to fulfill any type of customer need in transferring
virtually any type of product or goods by many different forms and time
scenarios; and
* secure transfer of information over the Internet.
The Company was incorporated in Utah in 1979 under the name Basin
Energy Corporation. The Company has amended its name several times since then.
In 1992 the Company changed its name to U-Ship, Inc., and in May 1999 to United
Shipping & Technology, Inc. From 1979 until 1991, the Company was engaged in
business activities that were unrelated to its current business. The Company's
principal executive offices are located at 9850 51st Avenue North, Suite 110,
Minneapolis, Minnesota 55442 and its telephone number is (612) 941-4080. The
Company's website is www.u-s-t.com.
RESULTS OF OPERATIONS:
Comparison of Quarters Ended September 30, 2000 and October 2, 1999
Revenue for the quarter ended September 30, 2000, increased $79,367, or
148%, to $133,091 from $53,724 for the quarter ended October 2, 1999. The
increase is primarily due to the Velocity acquisition which occurred in the
quarter ended October 2, 1999, but was only included in the financial results of
the Company since August 28, 1999.
Cost of service expense increased $66,381, or 156%, to $108,820 from
$42,439 for the quarter ended October 2, 1999. The increase is primarily due to
the Velocity Express acquisition.
Selling, general and administrative expenses for the quarter ended
September 30, 2000, increased $14,927, or 139% to $25,636 from $10,709 for the
quarter ended October 2, 1999. The increase is primarily due to the Velocity
Express acquisition.
Marketing expenses for the quarter ended September 30, 2000, increases
$2,115, or 103%, to $4,170 from $2,055 for the quarter ended October 2, 1999.
The increase is primarily due to the Velocity Express acquisition.
Net interest expense increased to $1,617 for the quarter ended
September 30, 2000 compared to $137 for the quarter ended October 2, 1999. The
increase is primarily due to the increase in debt associated with the Velocity
acquisition.
Net loss for the quarter ended September 30, 2000, increased $5,569, or
345%, to $7,185 from $1,616 for the quarter ended October 2, 1999. The increase
is primarily due to the Velocity Express acquisition.
LIQUIDITY AND CAPITAL RESOURCES:
Historically, the Company has operated at a loss and has funded its
operations from the proceeds of public and private equity offerings. Throughout
fiscal 2000 and continuing through the first quarter of fiscal 2001, the Company
has financed the implementation of its revised business strategy through various
private placements of equity, including sales of common stock and preferred
stock, warrant exercises and the sale of warrants.
On September 22, 2000, the Company completed a sale of shares of its
Series C Convertible Preferred Stock (the "Series C Preferred") and warrants to
purchase additional shares of Series C Preferred to TH Lee.Putnam Internet
Partners, L.P., TH Lee.Putnam Internet Parallel Partners, L.P., THLi
Coinvestment Partners LLC, and Blue Star I, LLC (collectively the "THLi Funds")
under the terms of a Securities Purchase
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Agreement (the "Series C Agreement") that the Company entered into with the
THLi Funds as of September 1, 2000.
Pursuant to the Series C Agreement, the Company sold 2,000,000 shares
of its Series C Preferred to the THLi Funds, at a price of $6.00 per share, for
a total purchase price of $12,000. The Company also agreed to issue the THLi
Funds warrants to purchase a total of 825,484 additional shares of its Series C
Preferred for a period of five years at an exercise price of $0.01 per share
(the "Series C Warrants"). This investment was structured into two tranches. The
first, in the amount of $5,000, was made on September 1, 2000 and the second, in
the amount of $7,000, was completed on September 22, 2000.
In exchange for the Series C Warrants, the THLi Funds canceled the
Series B Warrants issued in connection with a previous purchase on May 31, 2000
by members of the THLi Funds of Series B Preferred.
The shares of Series C Preferred are convertible into shares of the
Company's Common Stock (or shares or units of any security into which the Common
Stock is changed) at a conversion rate of 1:1, subject to adjustment to prevent
dilution. The shares of Series C Preferred require the Company to redeem each
outstanding share at $6.00 per share, subject to adjustment, on August 31, 2006
or earlier upon the happening of certain events delineated in the Certificate of
Designation creating the Series C Preferred. The shares of Series C Preferred
purchased pursuant to the Series C Agreement were, as of September 22, 2000,
convertible into 2,000,000 shares of Company Common Stock, representing
approximately 6% of the Company's Common Stock outstanding on a fully diluted
basis.
In fiscal 2001 and beyond, the Company plans to focus on the various
aspects of its acquisition strategy, seeking acquisitions in the same-day
delivery market and supporting technology, and the building of a nationally
recognized brand name to be used in conjunction with such services. The Company
believes that these efforts will require the Company to expend significant
capital. While the Company will seek to acquire companies that have profits or
positive cash flow, or that have the potential to generate positive cash flow in
the future, it is likely that any positive cash flow that would otherwise result
will be utilized in connection with the Company's ongoing consolidation
strategy. The Company believes that these revised strategies, while initially
requiring additional cash outlays, may result in greater revenues from same-day
delivery operations, although no assurance can be given that such revenues will
increase appreciably as a result of these initiatives in the near future, if at
all.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As of September 30, 2000, and prior to its acquisition of Velocity in
September 1999, the Company was not a party to any material legal proceedings.
Velocity and certain related parties are parties to lawsuits arising out of the
business of Velocity.
Velocity 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 delivery services.
Velocity carries workers compensation insurance and auto liability coverage,
both subject to a deductible for the current policy year in the amount of
$250,000. Velocity and its subsidiaries are also named as defendants in various
employment-related lawsuits arising in the ordinary course of the business. The
Company vigorously defends against all of the foregoing claims.
The Company does not believe that the pending lawsuits, if resolved or
settled unfavorably to the Company, would have a material adverse effect upon
the Company's financial position or results of operations. A monetary settlement
paid by the Company or an award against it in any of such actions could,
however, have a material adverse effect upon the Company's cash flow in a given
period in which a settlement or award occurs. The Company has established an
accrual for losses it may sustain in the pending actions as of September 30,
2000 in the amount of $11.3 million. The Company believes that such an accrual
level is adequate for purposes of its financial statements.
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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 which 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:
o 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.
o 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 which 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.
o Although the Company has numerous claims, few, if any, are believed to
have the potential to have a material adverse impact on the Company on
a consolidated basis. An award against the Company or a subsidiary, or
a settlement paid by it, in connection with currently pending claims
could, however, have a material adverse effect upon the Company's cash
flow in a given period in which an award or settlement occurs. Further,
multiple awards against, or settlements by, the Company or its
subsidiaries in a particular period could have a material adverse
effect upon the Company's financial condition, cash flow and results of
operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In September 2000, the Company issued to a group of accredited
investors 2,000,000 shares of its Series C Convertible Preferred Stock at a
total purchase price of approximately $12 million, together with warrants to
purchase 825,484 shares of the Company's Series C Convertible Preferred Stock at
an exercise price of $.01 per share. In exchange for the Series C Warrants, the
Company canceled two warrants to purchase the Company's Series B Convertible
Preferred Stock issued in May 2000 and approved on August 14, 2000. (See Notes
to Consolidated Financial Statements, Note 9).
In October 2000 the Company issued a non-qualified stock option outside
of the Company's 2000 Stock Option Plan to an employee of Velocity Express for
the purchase of 250,000 shares of Common Stock at a purchase price of $3.531 per
share. In November 2000, the Company issued to an employee a warrant to purchase
24,930 shares of Common Stock at a price of $7.50 per share for a period of 5
years, and issued an accredited investor a warrant to purchase an aggregate of
50,000 shares of Common Stock at an exercise price of $11.00 per share for a
period of five years.
In August 2000, pursuant to a settlement agreement dated June 20, 2000,
between the Company and a former employee, Jack D. Ashabranner III, the Company
issued 100,000 shares of the Company's common stock in connection with the
settlement of certain litigation. These shares were placed in escrow pending the
registration of the shares or the earlier termination of the agreement.
No underwriters or placement agents were used in connection with the
above-referenced securities transactions, and no underwriting commissions were
paid. No means of general solicitation was used in offering the securities. The
securities in the transaction were sold to a limited group of accredited
investors in a private placement transaction, exempt from registration under
Section 4(2) of the Securities Act. All purchasers of the Company's securities
were sophisticated investors who qualified as accredited investors within the
meaning of Rule 501(a) of Regulation D under the Securities Act. Except where
otherwise
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indicated, the Company intends to use the net proceeds from the sale of these
securities for working capital and to fund acquisitions.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
On August 14, 2000, the Company held a Special Meeting of Shareholders.
The sole proposal submitted for shareholder approval passed with voting
results as follows:
o To ratify and approve the issuance and purchase of the
Company's Series B Convertible Preferred Stock, par value
$.004 per share ("Series B Preferred"), by TH Lee.Putnam
Internet Partners, L.P. and TH Lee.Putnam Internet Parallel
Partners, L.P. (collectively, "TH Lee"), including TH Lee's
exercise of warrants for the purchase of up to an aggregate of
3,381,729 additional shares of Series B Preferred (assuming an
average closing sales price of the Company's Common Stock on
the Nasdaq SmallCap Market during the 45 consecutive trading
days immediately prior to exercise (the "Market Price") of
$10.243 on June 20, 2000) and 425,000 shares of Common Stock
upon the exercise of warrants issued to TH Lee.
For: 10,561,397 Against: 80,402
Abstain: 37,187 Non-Votes: 4,183,958
ITEM 5. OTHER INFORMATION.
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits required by Item 601 of Regulation S-B:
Reference is made to the Exhibit Index.
b. Reports on Form 8-K
The Company filed one report on Form 8-K during the fiscal
quarter ended September 30, 2000, as follows:
(1) Current Report on Form 8-K filed on September 8,
2000, relating to the announcement that the Company
had completed a private placement with TH Lee.Putnam
Internet Partners, L.P., TH Lee.Putnam Internet
Parallel Partners, L.P., THLi Coinvestment Partners
LLC, and Blue Star I, LLC.
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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 City of Plymouth, State of Minnesota on November 13, 2000.
UNITED SHIPPING & TECHNOLOGY, INC.
By /s/ Peter C. Lytle
-------------------------------------
Peter C. Lytle
President and Chief Executive Officer
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EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
Exhibit 4.1 Securities Purchase Agreement among United Shipping &
Technology, Inc., TH Lee.Putnam Internet Partners, L.P., TH
Lee.Putnam Internet Parallel Partners, L.P., THLi Coinvestment
Partners LLC and Blue Star I, LLC, dated as of September 1,
2000 (incorporated by reference to the Company's Form 8-K,
File Number 719209, filed September 8, 2000).
Exhibit 10.1 Stock Purchase Warrant to Acquire Series C Preferred Stock,
Certificate No. W-7, issued September 1, 2000 by United
Shipping & Technology, Inc. to TH Lee.Putnam Internet
Partners, L.P. for 187,290 shares of Series C Preferred Stock
at a price per share equal to $0.01 (incorporated by reference
to the Company's Form 8-K, File Number 719209, filed September
8, 2000).
Exhibit 10.2 Stock Purchase Warrant to Acquire Series C Preferred Stock,
Certificate No. W-8, issued September 1, 2000 by United
Shipping & Technology, Inc. to TH Lee.Putnam Internet
Partners, L.P. for 142,042 shares of Series C Preferred Stock
at a price per share equal to $0.01 (incorporated by reference
to the Company's Form 8-K, File Number 719209, filed September
8, 2000).
Exhibit 10.3 Stock Purchase Warrant to Acquire Series C Preferred Stock,
Certificate No. W-9, issued September 1, 2000 by United
Shipping & Technology, Inc. to THLi Coinvestment Partners, LLC
for 10,598 shares of Series C Preferred Stock at a price per
share equal to $0.01 (incorporated by reference to the
Company's Form 8-K, File Number 719209, filed September 8,
2000).
Exhibit 10.4 Stock Purchase Warrant to Acquire Series C Preferred Stock,
Certificate No. W-10, issued September 1, 2000 by United
Shipping & Technology, Inc. to Blue Star I, LLC for 4,024
shares of Series C Preferred Stock at a price per share equal
to $0.01 (incorporated by reference to the Company's Form 8-K,
File Number 719209, filed September 8, 2000).
Exhibit 10.5 Stock Purchase Warrant to Acquire Series C Preferred Stock,
Certificate No. W-11, to be issued at the time of the Second
Closing by United Shipping & Technology, Inc. to TH Lee.Putnam
Internet Partners, L.P. for 262,204 shares of Series C
Preferred Stock at a price per share equal to $0.01
(incorporated by reference to the Company's Form 8-K, File
Number 719209, filed September 8, 2000).
Exhibit 10.6 Stock Purchase Warrant to Acquire Series C Preferred Stock,
Certificate No. W-12, to be issued at the time of the Second
Closing by United Shipping & Technology, Inc. to TH Lee.Putnam
Internet Parallel Partners, L.P. for 198,855 shares of Series
C Preferred Stock at a price per share equal to $0.01
(incorporated by reference to the Company's Form 8-K, File
Number 719209, filed September 8, 2000).
Exhibit 10.7 Stock Purchase Warrant to Acquire Series C Preferred Stock,
Certificate No. W-13, to be issued at the time of the Second
Closing by United Shipping & Technology, Inc. to THLi
Coinvestment Partners LLC for 14,837 shares of Series C
Preferred Stock at a price per share equal to $0.01
(incorporated by reference to the Company's Form 8-K, File
Number 719209, filed September 8, 2000).
Exhibit 10.8 Stock Purchase Warrant to Acquire Series C Preferred Stock,
Certificate No. W-14, to be issued at the time of the Second
Closing by United Shipping & Technology, Inc. to Blue Star I,
LLC for 5,634 shares of Series C Preferred Stock at a price
per share equal to $0.01 (incorporated by reference to the
Company's Form 8-K, File Number 719209, filed September 8,
2000).
Exhibit 10.9 Amended and Restated Registration Rights Agreement, among
United Shipping & Technology, Inc., TH Lee.Putnam Internet
Partners, L.P., TH Lee.Putnam Internet Parallel Partners,
L.P., THLi Coinvestment Partners LLC and Blue Star I, LLC,
dated as of
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September 1, 2000 (incorporated by reference to the Company's
Form 8-K, File Number 719209, filed September 8, 2000).
Exhibit 10.10. Form of Stock Restriction Agreement, entered into as of
September 1, 2000 between TH Lee.Putnam Internet Partners,
L.P. and each of Peter Lytle, Tim Becker and Michael Harris
(incorporated by reference to the Company's Form 8-K, File
Number 719209, filed September 8, 2000).
Exhibit 10.11 Mutual Release and Contract of Settlement, dated June 20,
2000, between Jack D. Ashabranner II, UST Delivery Systems,
Inc. and United Shipping & Technology, Inc., as amended on
July 31, 2000, whereby Mr. Ashabranner and his counsel, London
& Schaeffer, L.L.P. were issued 100,000 shares of the
Company's Common Stock in connection with the settlement of
certain litigation against Velocity Express, Inc.
(incorporated by reference to the Company's Form 10-KSB, File
Number 000-28452, filed September 29, 2000).
Exhibit 10.12 Form of nonqualified stock option issued to an employee of
Velocity Express in October 2000.
Exhibit 10.13 Form of warrant issued to employee in November 2000.
Exhibit 10.14 Form of warrant issued to accredited investor in November
2000.
Exhibit 27 Financial Data Schedule.
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