<PAGE> 1
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: April 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: ________ to: _________
Commission File Number: 33-75432C
UNITED MARKET SERVICES COMPANY
------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 41-1642910
-------- ----------
(State of incorporation or organization) (IRS Employer Identification Number)
14500 Burnhaven Drive, Suite 141
Burnsville, Minnesota 55337
----------------------------
(Address of principal executive offices)
(612)435-7788
-------------
(Issuer's telephone number)
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 such shorter
period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days:
X Yes No
---- ----
The number of shares outstanding of each of the issuer's classes of common
equity as of June 9, 1997:
6,636,885 shares of Common Stock $0.001 par value
-------------------------------------------------
(assuming all shares of common stock issuable pursuant to the settlement and
- ----------------------------------------------------------------------------
exchange offer are outstanding)
- ------------------------------
Transitional Small Business Issuer Disclosure Format: Yes X No
---- ----
<PAGE> 2
PART I, ITEM 1. FINANCIAL STATEMENTS
UNITED MARKET SERVICES COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, April 30,
1996 1997
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash .......................................................... $2,398,188 $1,150,953
Restricted cash ............................................... 50,000 50,000
Accounts receivable ........................................... 315,888 409,653
Inventories ................................................... 38,341 10,526
Prepaid expenses and other .................................... 38,516 73,679
Net assets of discontinued operations ......................... 719,304 --
----------- -----------
Total current assets .......................................... 3,560,237 1,694,811
Property and equipment
Yard improvements ............................................. 5,444,073 5,444,073
Buildings ..................................................... 698,310 698,310
Machinery and equipment ....................................... 344,516 344,516
Furniture and fixtures ........................................ 57,966 57,966
Less: accumulated depreciation ................................ (5,374,071) (5,507,571)
----------- -----------
Property and equipment, net ................................... 1,170,794 1,037,294
Other assets ................................................... 432,187 23,334
----------- -----------
Total assets .................................................. $5,163,218 $2,755,439
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long term debt .......................... $6,050,000 30,000
Accounts payable .............................................. 186,825 232,181
Accrued liabilities:
Litigation ................................................... 585,000 507,052
Other ........................................................ 601,114 223,100
----------- -------
Total current liabilities ...................................... 7,422,939 992,333
Long - term post retirement obligation ......................... 280,567 248,055
----------- -----------
COMMON STOCK HOLDERS' EQUITY (DEFICIT)
Common stock, $0.001 par value, 10,000,000 shares authorized,
2,891,277 shares and 6,636,885 shares issued and outstanding .. 2,891 6,637
Additional paid-in capital .................................... 4,626,624 5,372,000
Accumulated deficit ........................................... (7,169,803) (3,863,586)
----------- -----------
Total common stockholders' equity (deficit) ................... (2,540,288) 1,515,051
----------- -----------
Total liabilities and stockholders' investment ............... $5,163,218 $2,755,439
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
2
<PAGE> 3
PART I, ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
UNITED MARKET SERVICES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended April 30, Six Months Ended April 30,
------------------------------ ----------------------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING REVENUES ................................... $1,986,218 $1,947,909 $4,041,542 $3,890,651
OPERATING EXPENSES:
Labor and benefits .................................. 718,879 656,795 1,470,333 1,330,414
Operations and maintenance .......................... 992,865 824,508 1,916,712 1,644,367
Selling, general, and administrative expenses ....... 319,824 251,702 710,553 521,740
Depreciation and amortization expense ............... 159,000 60,000 318,000 138,500
Restructuring reserves and asset writedowns ......... 1,565,000 -- 1,565,000 --
-------------- -------------- ------------- -------------
Total costs and operating expenses .................. 3,755,568 1,793,005 5,980,598 3,635,021
-------------- -------------- ------------- -------------
OPERATING INCOME (LOSS) .............................. (1,769,350) 154,904 (1,939,056) 255,630
NET INTEREST EXPENSE ................................. 143,721 (3,000) 287,440 --
-------------- -------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES .................... (1,913,071) 157,904 (2,226,496) 255,630
Income tax expense .................................. 438,000 -- 438,000 --
-------------- -------------- ------------- -------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS ......... (2,351,071) 157,904 (2,664,496) 255,630
-------------- -------------- ------------- -------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS ........... (804,007) -- (817,743) --
-------------- -------------- ------------- -------------
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT ......... -- 3,582 -- 3,050,587
-------------- -------------- ------------- -------------
NET INCOME (LOSS) .................................... (3,155,078) 161,486 (3,482,239) 3,306,217
Dividends accrued on Preferred Stock, not yet paid .. 19,607 -- 39,213 --
-------------- -------------- ------------- -------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK ....... ($3,174,685) $161,486 ($3,521,452) $3,306,217
============== ============== ============= =============
Earnings (loss) per share:
Income (loss) before extraordinary items ............ (2.90) 0.02 (3.28) 0.05
Loss from discontinued operations ................... (0.99) -- (1.01) --
Extraordinary gain on extinguishment of debt ........ -- -- -- 0.58
-------------- -------------- ------------- -------------
Net income (loss) ................................... (3.89) 0.02 (4.29) 0.63
Dividends accrued on Preferred Stock, not yet paid .. (0.02) -- (0.05) --
Net income (loss) attributable to Common Stock ...... ($3.91) $0.02 ($4.34) $0.63
============== ============== ============= =============
Common weighted shares outstanding ................... 811,777 6,636,885 811,777 5,280,617
============== ============== ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
PART I, ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
UNITED MARKET SERVICES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended April 30,
1996 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) .................................... ($3,482,239) $3,306,217
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Extraordinary gain on extinguishment of debt ........ -- (3,050,587)
Depreciation and amortization ....................... 318,000 138,500
Net cash provided by discontinued operations ........ 625,283 719,304
Change in deferred tax .............................. 438,000 --
------- -------
Operating cash flow before working capital items .... (2,100,956) 1,113,434
Changes in operating assets and liabilities:
Accounts receivable ................................... 35,062 (93,765)
Income tax refunds receivable ......................... 124,045 --
Inventories ........................................... (3,787) 27,815
Prepaid expenses and other ............................ (56,905) (35,163)
Checks written, not yet presented for payments ........ 91,407 --
Accounts payable, other accrued liabilities, and post
retirement obligation .............................. 1,145,163 (263,591)
--------- --------
Net cash provided by (used in) operating activities .. ($765,971) $748,730
--------- --------
INVESTING ACTIVITIES:
Additions to property and equipment .................. (8,796) --
------ --------
FINANCING ACTIVITIES:
Payments on subordinated debt ........................ -- (1,995,965)
------ ----------
DECREASE IN CASH ...................................... (774,767) (1,247,235)
Cash, beginning of year .............................. 887,976 2,398,188
------- ---------
Cash, end of period .................................. $113,209 $1,150,953
========== ==========
CASH PAID DURING THE PERIOD FOR:
Interest ............................................. $695,490 $--
======== ===
Income taxes ......................................... ($129,069) ($1,300)
========= =======
NON CASH FINANCING ACTIVITIES:
Extinguishment of subordinated debt .................. -- $4,024,035
Conversion of subordinated debt ...................... -- $749,122
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE> 5
PART I, ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
UNITED MARKET SERVICES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. ORGANIZATION AND NATURE OF BUSINESS
United Market Services Company (the "Company") operates five stockyards
located in Sioux Falls, South Dakota; Sioux City, Iowa; Omaha, Nebraska; St.
Joseph, Missouri; and Milwaukee, Wisconsin. The Company's stockyards include
four of the eight markets that provide price and volume information for the
daily report published by the Agricultural Marketing Service of the U.S.
Department of Agriculture.
The Company was formed in June 1989, and in October 1989, acquired the
United Stockyards Division of Canal Capital Corporation, a business with over
100 years of history in livestock marketing.
With the unfavorable economic circumstances in the cattle industry and the
Company's financial situation in April 1996, the Company suspended financing
any new cattle contracts and has closed all existing contracts as of March 1,
1997. On August 9, 1996, the secured bank loans were repaid and the credit
facility expired August 15, 1996. The Company has not negotiated a new line of
credit.
During the fourth quarter of fiscal 1996, the Company informed its
subordinated noteholders that it would not make its quarterly interest payment
due September 1, 1996 and subsequently did not pay the quarterly interest
payments due on December 1, 1996, and March 1, 1997. On November 14, 1996, the
Company made a settlement and exchange offer to the noteholders to accept $331
in cash and the option to receive 717 shares of the Company's common stock in
exchange for each $1,000 principal amount in outstanding notes and the
forgiveness of all unpaid interest on the debt. The offer was to expire
December 20, 1996 and was extended to March 14, 1997. As of April 30, 1997
over 99% of the noteholders had accepted the offer, and of these, approximately
86% accepted the option to receive an equity interest in the Company. Four
subordinated noteholders, representing $35,000 in notes, did not accept the
offer and the Company purchased their subordinated notes at par. There are no
remaining subordinated notes as of June 9, 1997.
As a result of this restructuring, the Company had, as of April 30, 1997,
paid $1,996,000 in cash, and had written off $404,000 of unamortized deferred
financing costs, $240,000 of accrued interest expense and $6,015,000 of its
long-term debt. The Company is also committed to issue 3,745,608 shares of
common stock to the noteholders who elected to take equity in the settlement
and exchange offer. Most of these shares have already been issued. The
Company recognized and extraordinary gain on extinguishment of debt of
$3,051,000.
Prior to commencement of the settlement and exchange offer, all holders of
the Company's preferred stock converted their preferred stock into shares of
the Company's common stock.
NOTE 2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles and pursuant to the rules and regulations of the Securities and
Exchange Commission for interim financial information. They should be read in
conjunction with the annual audited financial statements and accompanying notes
included in the Company's Annual Report on Form 10-KSB for the fiscal year
ended October 31, 1996.
5
<PAGE> 6
PART I, ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
UNITED MARKET SERVICES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2. BASIS OF PRESENTATION (CONTINUED)
The interim financial statements presented herein as of April 30, 1997,
and for the three and six month periods ended April 30, 1996 and 1997, reflect,
in the opinion of management, all adjustments necessary for a fair presentation
of financial position and the results of operations for the periods presented.
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 as of the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates. The Company's significant
estimates include reserves for inventory losses, accounts receivable, and
litigation settlement.
Quarterly operating results are typically affected by seasonal factors
related to the cattle production cycle. As a consequence of these factors, the
results of operations for any interim period are not necessarily indicative of
results for the full year.
6
<PAGE> 7
PART I, ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
UNITED MARKET SERVICES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3. SEGMENTS OF BUSINESS
Selected data with respect to the Company's principal business segments
are as follows:
<TABLE>
<CAPTION>
Three Months Ended April 30, Six Months Ended April 30,
------------------------------ ----------------------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
LIVESTOCK MARKETING
Operating Revenues ............................ $1,986,218 $1,947,909 $4,041,542 $3,890,651
Operating costs and expenses:
Direct operating costs and expenses .......... 1,773,366 1,633,275 3,503,699 3,281,654
Depreciation ................................. 120,000 57,500 240,000 133,500
----------- ---------- ----------- ----------
Total operating costs and expenses .......... 1,893,366 1,690,775 3,743,699 3,415,154
----------- ---------- ----------- ----------
Operating income .............................. 92,852 257,134 297,843 475,497
CORPORATE:
Costs and expenses:
General and administrative expenses .......... 258,202 99,730 593,899 214,867
Restructuring reserve and asset writedowns ... 1,565,000 -- 1,565,000 --
Interest expense on long term debt ........... 143,721 (3,000) 287,440 --
Amortization ................................. 39,000 2,500 78,000 5,000
----------- ---------- ----------- ----------
Total costs and expenses .................... 2,005,923 99,230 2,524,339 219,867
----------- ---------- ----------- ----------
Income (loss) before income tax ............... (1,913,071) 157,904 (2,226,496) 255,630
Income tax expense ............................ 438,000 -- 438,000 --
----------- ---------- ----------- ----------
Income (loss) from continuing operations before
extraordinary items ......................... (2,351,071) 157,904 (2,664,496) 255,630
Discontinued operations ....................... (804,007) -- (817,743) --
Extraordinary gain on extinguishment of debt .. -- 3,582 -- 3,050,587
----------- ---------- ----------- ---------
Net income (loss) ............................. (3,155,078) 161,486 (3,482,239) 3,306,217
Dividends accrued on Preferred Stock, not yet
paid ........................................ 19,607 -- 39,213 --
----------- ---------- ----------- ----------
Net income (loss) attributable to Common Stock ($3,174,685) $161,486 ($3,521,452) $3,306,217
=========== ========== =========== ==========
CAPITAL EXPENDITURES:
Livestock marketing:
Additions (sales) of property and equipment .. ($3,864) $-- $8,796 $--
----------- ---------- ----------- ----------
ANIMAL UNITS HANDLED .......................... 262,236 244,188 535,947 466,382
=========== ========== =========== ==========
</TABLE>
7
<PAGE> 8
PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
Stockyard animal unit volumes and revenues continue to decline in direct
response to the difficult markets and corresponding decline in numbers of
smaller farmer/producers. Animal unit volumes in the first 6 months of fiscal
year 1997 were 13% lower than last year's first half. The extreme pressure on
producer costs has caused severe distress for some of the Company's cattle and
hog customers, resulting in fewer smaller producers who are the typical
stockyards customer.
With the continued upheaval and uncertainty in the grain and cattle
markets, management judged that it was not economically prudent for the Company
to continue financing new cattle purchases in the current environment.
Consequently, the Company notified its existing customers in April, 1996 that
it was suspending its cattle finance business and the Company closed all
financing contracts as of March 1, 1997.
During the third quarter 1996, the Company recorded an additional $400,000
reserve reflecting a ruling by the Minnesota Court of Appeals allowing punitive
damages related to a September 1995 jury award (See Part II, Item 1. Legal
Proceedings). An appeal to the Minnesota Supreme Court was made on January 15,
1997, and the damages award was upheld in April 1997. On May 29, 1997 a
settlement was reached and a satisfaction of judgement was entered in Dakota
County District Court.
During the fourth quarter of fiscal 1996, the Company informed the
subordinated noteholders that it would not make its quarterly interest payment
due September 1, 1996, and subsequently did not pay the quarterly interest
payments due on December 1, 1996 and March 1, 1997. On November 14, 1996, the
Company made a settlement and exchange offer to the bondholders to accept $331
in cash and the option to receive 717 shares of the Company's common stock in
exchange for each $1,000 principal amount in outstanding notes and the
forgiveness of all unpaid interest on the debt. The offer expired on December
20, 1996 and was extended to March 14, 1997. As of April 30, 1997 over 99% of
the bondholders had accepted the offer, and of these, approximately 86% have
accepted the option to receive an equity interest in the Company. Four
subordinated noteholders, representing $35,000 in notes, did not accept the
offer and the Company purchased their subordinated notes at par. There are no
remaining subordinated notes at this time.
As a result of this restructuring, the Company had, as of April 30, 1997,
paid $1,996,000 in cash, and had written off $404,000 of unamortized deferred
financing costs, $240,000 of accrued interest expense and $6,015,000 of its
long-term debt. The Company is also committed to issue 3,745,608 shares of
common stock to the noteholders who elected to take equity in the settlement
and exchange offer. Most of these shares have been issued as of April 30,
1997. The Company recognized an extraordinary gain on extinguishment of debt
of $3,051,000 for the six months ended April 30, 1997.
Prior to commencement of the settlement and exchange offer, all holders of
the Company's preferred stock converted their preferred stock into shares of
the Company's common stock.
Comparison of the Second Quarter of Fiscal 1996 and the Second Quarter of
Fiscal 1997
Livestock Marketing
Operating Revenues. For the three months ended April 30, 1997, the
Company's livestock marketing revenues, principally yardage and commission
revenues, were $1,947,909, a decrease of 1.9% from the $1,986,218 of such
business recorded in the comparable 1996 period. This decrease in revenues
relates primarily to a 6.9% reduction in the animal marketing units handled
from 262,236 for the second quarter of 1996 to 244,188 for the same period in
1997, principally due to the significant volume reduction at the Sioux City and
Omaha markets.
Direct Operating Costs and Expenses. Operating costs and expenses in the
Company's livestock marketing segment include labor and benefits, operating and
maintenance expenses, depreciation, and unit-level general and administrative
costs. For the second quarter of fiscal 1997, these costs and expenses totaled
$1,690,775, a decrease of 10.7% from the comparable figure of $1,893,366 in
1996, partially reflecting the decreased volume of business. Depreciation
expense decreased 52.1% from 120,000 in 1996 to $57,500 in the second quarter
1997, primarily due to a 1996 writedown of impaired assets at all locations.
8
<PAGE> 9
PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of the Second Quarter of Fiscal 1996 and the Second Quarter of
Fiscal 1997 (continued)
Livestock Marketing (continued)
Operating Income. Overall, as a result of the aforementioned factors,
operating income from the livestock marketing operations of $257,134 in the
second quarter of 1997 represented an increase of 176.9% from the $92,852 of
such income reported in the 1996 period.
Corporate
Total Costs and Expenses. Corporate level costs and expenses are defined
to include general and administrative costs, interest expense on the Company's
long-term debt, and amortization of the offering costs associated with such
debt. Total costs and expenses for the second quarter of 1997 were $99,230,
down 95.5% from the $2,005,923 of such costs recorded in the comparable period
in 1996. General and administrative expenses for the second quarter of 1997
totaled $99,730 a decrease of 61.4% from the $258,202 of such costs reported in
1996. Included in the second quarter 1996 was a $1,565,000 restructuring
expense charge. Interest expense (income) on long-term debt totaled ($3,000)
in 1997 and $143,721 in 1996. Amortization expense was $2,500 in 1997 as a
result of the writeoff of the deferred financing costs, and $39,000 in 1996.
Income (Loss) from continuing Operations Before Extraordinary Items. Due
to the factors discussed above, the operating net income reported for the
second quarter 1997 from continuing operations was $157,904, compared to an
operating loss of $2,351,071 reported in 1996.
Discontinued Operations. Loss from discontinued operations of $804,007 in
the second quarter 1996 reflects management's decision to exit the cattle
finance business in the second quarter of 1996.
Income Taxes. The Company recorded no income tax expense during the
second quarter of 1997, while 1996 included a $438,000 writeoff of deferred tax
benefit no longer considered realizable.
Extraordinary Item. Extraordinary item of $3,050,587 reflects
restructuring of the Company's subordinated debt. The principal components of
the extraordinary gain are as follows:
<TABLE>
<CAPTION>
Current Qtr. First Half
------------ -----------
<S> <C> <C>
Extinguishment of subordinated debt $90,000 $6,020,000
Cash payments to former noteholders (33,139) (1,995,965)
Writeoff of deferred bond costs -- (403,853)
Forgiveness of accrued interest 5,000 239,527
------- ----------
Subtotal 61,861 3,859,709
Conversion of debt to equity 1,721 (749,122)
------- ----------
Extraordinary gain before tax 63,582 3,110,587
Taxes (60,000) (60,000)
------- ----------
Net extraordinary gain $3,582 $3,050,587
</TABLE>
The Company estimates that taxes related to the extraordinary gain will be
minimal.
9
<PAGE> 10
PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of the Second Quarter of Fiscal 1996 and the Second Quarter of
Fiscal 1997 (continued)
Net Income (Loss); Net Income (Loss) Attributable to Common Stock. Net
income reported for the second quarter of 1997 was $161,486, compared to a net
loss of $3,174,685 reported in the comparable 1996 period.
Net income or loss attributable to the Company's Common Stock in 1996 was
affected by dividends accrued on its Cumulative Redeemable Convertible
Preferred Stock (the "Preferred Stock"), 1,568,500 shares of which were
outstanding as of April 30, 1996. Dividends accumulated at a rate of $0.05 per
share per year. During the second quarter of 1996 the Company recorded $19,607
related to this dividend requirement. There were no dividend requirements on
either the Company's 1994 Series Redeemable Convertible Preferred Stock (the
"1994 Preferred Stock") or its 1995 Series Redeemable Convertible Preferred
Stock (the "1995 Preferred Stock").
Comparison of the Six Months Ended April 30, 1996 and the Six Months Ended
April 30, 1997
Livestock Marketing
Operating Revenues. For the six months ended April 30, 1997, the
Company's livestock marketing revenues, principally yardage and commission
revenues, were $3,890,651 down 3.7% from the $4,041,542 of such business
recorded in the comparable 1996 period. This decrease in revenues relates
primarily to a 13.0% reduction in the animal marketing units handled from
535,947 for the first half of 1996 to 466,382 for the same period in 1997,
principally due to significant volume reduction at the Sioux City and Omaha
markets.
Direct Operating Costs and Expenses. Operating costs and expenses in the
Company's livestock marketing segment include labor and benefits, operating and
maintenance expenses, depreciation, and unit-level general and administrative
costs. For the second quarter of fiscal 1997, these costs and expenses totaled
$3,415,154, a decrease of 8.8% from 1996's comparable figure of $3,743,699,
partially reflecting a decreased volume of business. Depreciation expense
decreased 44.4% from $240,000 in 1996 to $133,500 in second quarter 1997,
primarily due to a 1996 writedown of impaired assets at all locations.
Operating Income. Overall, as a result of the aforementioned factors,
operating income from the livestock marketing operations of $475,497 in the
second quarter of 1997 represented an increase of 59.6% from the $297,843 of
such income recorded in the 1996 period.
Corporate
Total Costs and Expenses. Corporate level costs and expenses are defined
to include general and administrative costs, interest expense on the Company's
long-term debt, and amortization of the offering costs associated with such
debt. Total costs and expenses for the first half of 1997 were $219,867, down
89.0% from the $2,005,923 of such costs recorded in the comparable period in
1996. General and administrative expenses for the second quarter of 1997
totaled $214,867 a decrease of 63.8% from the $593,899 of such costs reported
in 1996. Included in the second quarter 1996 was a $1,565,000 restructuring
expense and asset writedown charge. Interest expense on long-term debt totaled
$-0- in 1997 and $287,440 in 1996. Amortization expense was $5,000 in 1997 and
$78,000 in 1996, as a result of the writeoff of the deferred financing costs.
Income Taxes. The Company recorded no income tax expense during the
second quarter of 1997, while 1996 included a $438,000 writeoff of deferred tax
benefit no longer considered realizable.
Income (Loss) from Continuing Operations Before Extraordinary Item. Due
to the factors discussed above, the operating net income reported for the first
half of 1997 from continuing operations was $255,630, compared to an operating
loss of $2,664,496 reported in 1996.
Discontinued Operations. Loss from discontinued operations of $817,743 in
the first half of 1996 reflects management's decision to exit the cattle
finance business in the second quarter of 1996.
10
<PAGE> 11
PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of the Six Months Ended April 30, 1996 and the Six Months Ended
April 30, 1997 (continued)
Extraordinary Item. Extraordinary item of $3,050,587 reflects the
restructuring of the Company's subordinated debt.
Net Income (Loss); Net Income (Loss) Attributable to Common Stock. Net
income reported for the first half of 1997 was $3,306,217, compared to a net
loss of $3,521,452 reported in the comparable 1996 period.
Net income or loss attributable to the Company's Common Stock in 1996 was
affected by dividends accrued on its Cumulative Redeemable Convertible
Preferred Stock (the "Preferred Stock"), 1,568,500 shares of which were
outstanding as of April 30, 1996. Dividends accumulated at a rate of $0.05 per
share per year. During the first quarter of 1996 the Company recorded $39,213
related to this dividend requirement. There were no dividend requirements on
either the Company's 1994 Series Redeemable Convertible Preferred Stock (the
"1994 Preferred Stock") or its 1995 Series Redeemable Convertible Preferred
Stock (the "1995 Preferred Stock").
Liquidity and Capital Resources
The following table sets forth, as of the dates indicated, certain balance
sheet items as a percentage of total assets and the percentage increase or
decrease in such items from the prior date.
<TABLE>
<CAPTION>
Oct 31, April 30,
1996 1997 1996 vs. 1997
---- ---- -------------
<S> <C> <C> <C>
Discontinued operations ................ 13.9% 0.0% N/A
Livestock Marketing:
Net identifiable assets ............... 30.3 52.9 4.5
Corporate:
Cash .................................. 47.4 43.6 (49.1)
Other assets .......................... 8.4 3.5 (94.6)
Current liabilities ................... 143.8 36.0 (30.0)
Long-term post retirement obligation .. 5.4 9.0 (11.6)
Common stockholder's equity (deficit) .. (49.2) 55.0 N/A
</TABLE>
See recent developments for a discussion concerning the Company's liquidity
position and capital resources.
11
<PAGE> 12
PART II, ITEM 1. LEGAL PROCEEDINGS
Orville Molenaar v. United Cattle Company v. Michael J. Frank, Case No.
C2-94-10225 (Minn. D. Ct.). Orville Molenaar sued United Cattle Company
("UCC") in state court for conversion of cattle he alleged to own. This action
relates to cattle Mr. Molenaar allegedly placed with Michael J. Frank. Mr.
Molenaar claims that cattle he owned were part of the cattle UCC recovered from
Mr. Frank pursuant to replevin orders dated October 11, 1994. UCC filed a
third party complaint against Mr. Frank in this action. On September 14, 1995,
a jury determined that UCC committed conversion and was liable for $59,375 in
compensatory damages and $400,000 in punitive damages. On October 19, 1995,
the punitive damages were vacated by the court and the compensatory claim was
upheld. On December 20, 1995, UCC was granted summary judgement in its third
party action against Mr. Frank for indemnification, and UCC was awarded $59,375
in damages plus $9,000 for attorneys fees. Mr. Molenaar filed an appeal with
the Minnesota Court of Appeals seeking to overturn the vacating of the punitive
damages, and UCC filed a cross-appeal with respect to the compensatory damage
award. In an order dated July 30, 1996, the Court of Appeals reversed the
trial court's decision to vacate the punitive damages award and denied UCC's
cross-appeal. The Court of Appeals remanded the matter to the district court
to determine whether the amount of the jury's punitive damages award was
excessive. On January 15, 1997, the district court held a hearing on that
issue, at which time UCC asked the court to reduce the award to a nominal
amount based on UCC's financial situation. The damages award was upheld in
April, 1997. On February 28, 1997, United Cattle Company obtained a settlement
with Mr. Frank for $35,000, releasing Mr. Frank's judgement by UCC. On May 28,
1997 a settlement was reached with Mr. Molenaar and a satisfaction of judgement
was entered in Dakota County district court.
PART II, ITEM 2. CHANGES IN SECURITIES
During the fourth quarter of fiscal 1996, the Company informed its
subordinated noteholders that it would not make its quarterly interest payment
due September 1, 1996 and subsequently did not pay the quarterly interest
payments due on December 1, 1996, and March 1, 1997. On November 14, 1996, the
Company made a settlement and exchange offer to the noteholders to accept $331
in cash and the option to receive 717 shares of the Company's common stock in
exchange for each $1,000 principal amount in outstanding notes and the
forgiveness of all unpaid interest on the debt. The offer was to expire
December 20, 1996 and was extended to March 14, 1997. As of April 30, 1997
over 99% of the noteholders had accepted the offer, and of these, approximately
86% accepted the option to receive an equity interest in the Company. Four
subordinated noteholders, representing $35,000 in notes, did not accept the
offer and the Company purchased their subordinated notes at par. There are no
remaining subordinated notes as of June 9, 1997.
As a result of the settlement and exchange offer, the Company is committed
to issue an aggregate of 3,745,608 shares of its common stock to those
noteholders who elected to take equity in the offer. Approximately 95% of
these shares have been issued as of April 30, 1997.
See also Part II, Item 3 - Defaults Upon Senior Securities.
PART II, ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Since February 29, 1996, the Company has continued to be out of compliance
with Article Ten, Section 1012 of the Indenture governing the terms of its
outstanding Subordinated Notes with respect to the maintenance of a minimum net
worth. During the fourth quarter of fiscal 1996, the Company informed its
subordinated noteholders that it would not make its quarterly interest payment
due September 1, 1996 and subsequently did not pay the quarterly interest
payments due on December 1, 1996, and March 1, 1997. On November 14, 1996, the
Company made a settlement and exchange offer to the noteholders to accept $331
in cash and the option to receive 717 shares of the Company's common stock in
exchange for each $1,000 principal amount in outstanding notes and the
forgiveness of all unpaid interest on the debt. The offer was to expire
December 20, 1996 and was extended to March 14, 1997. As of April 30, 1997
over 99% of the noteholders had accepted the offer, and of these, approximately
86% accepted the option to receive an equity interest in the Company. Four
subordinated noteholders, representing $35,000 in notes, did not accept the
offer and the Company purchased their subordinated notes at par. There are no
remaining subordinated notes as of June 9, 1997. As a consequence of the
exchange of all outstanding notes under the Indenture, the prior defaults will
have no consequence on the Company.
12
<PAGE> 13
PART II, ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended April 30, 1997.
13
<PAGE> 14
SIGNATURES
In accordance with the requirements of the Exchange Act, the issuer caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
UNITED MARKET SERVICES COMPANY
Dated: June 13, 1997 By:
------------------- ------------------------------
Dean Bachelor
Chief Executive Officer
(Principal Executive Officer)
Dated: June 13, 1997 By:
-------------------- ------------------------------
H. M. Blair
Controller and Assistant Treasurer
(Principal Financial Officer)
14
<PAGE> 15
SIGNATURES
In accordance with the requirements of the Exchange Act, the issuer caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
UNITED MARKET SERVICES COMPANY
Dated: June 13, 1997 By: /s/ Dean Bachelor
-------------------- -------------------
Dean Bachelor
Chief Executive Officer
(Principal Executive Officer)
Dated: June 13, 1997 By: /s/ H. M. Blair
-------------------- -----------------
H. M. Blair
Controller and Assistant Treasurer
(Principal Financial Officer)
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNITED
MARKET SERVICES FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1997
<PERIOD-END> APR-30-1997
<CASH> 1,200,953
<SECURITIES> 0
<RECEIVABLES> 442,537
<ALLOWANCES> 32,884
<INVENTORY> 10,526
<CURRENT-ASSETS> 1,694,811
<PP&E> 6,544,865
<DEPRECIATION> 5,507,571
<TOTAL-ASSETS> 2,755,439
<CURRENT-LIABILITIES> 992,333
<BONDS> 0
0
0
<COMMON> 5,378,637
<OTHER-SE> (3,863,586)
<TOTAL-LIABILITY-AND-EQUITY> 2,755,439
<SALES> 0
<TOTAL-REVENUES> 3,890,651
<CGS> 0
<TOTAL-COSTS> 2,974,781
<OTHER-EXPENSES> 660,240
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 255,630
<INCOME-TAX> 0
<INCOME-CONTINUING> 255,630
<DISCONTINUED> 0
<EXTRAORDINARY> 3,050,587
<CHANGES> 0
<NET-INCOME> 3,306,217
<EPS-PRIMARY> .63
<EPS-DILUTED> .63
</TABLE>
