<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: July 31, 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 September 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, July 31,
1996 1997
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,398,188 $ 738,180
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 50,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315,888 536,940
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,341 16,516
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . 38,516 24,914
Net assets of discontinued operations . . . . . . . . . . . . . . . . . . . . . 719,304 --
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,560,237 1,366,550
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) (5,565,071)
----------- -----------
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . 1,170,794 979,794
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 432,187 20,835
----------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,163,218 $ 2,367,179
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long term debt . . . . . . . . . . . . . . . . . . . . . $ 6,050,000 --
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186,825 151,151
Accrued liabilities:
Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 585,000 200,000
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 601,114 275,371
----------- -----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,422,939 626,522
Long - term post retirement obligation . . . . . . . . . . . . . . . . . . . . . 280,567 239,615
----------- -----------
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) (3,877,595)
----------- -----------
Total common stockholders' equity (deficit) . . . . . . . . . . . . . . . . . . (2,540,288) 1,501,042
----------- -----------
Total liabilities and stockholders' investment . . . . . . . . . . . . . . . $ 5,163,218 $ 2,367,179
=========== ===========
</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 July 31, Nine Months Ended July 31,
--------------------------- --------------------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING REVENUES . . . . . . . . . . . . . . . . . . $1,652,985 $1,562,369 $ 5,694,527 $5,453,020
OPERATING EXPENSES:
Labor and benefits . . . . . . . . . . . . . . . . . 639,235 612,909 2,109,570 1,943,323
Operations and maintenance . . . . . . . . . . . . . 827,055 706,302 2,743,767 2,350,669
Selling, general, and administrative expenses . . . . 277,046 197,167 987,599 718,907
Depreciation and amortization expense . . . . . . . . 138,600 60,000 456,600 198,500
Restructuring reserves and asset writedowns . . . . . 400,000 -- 1,965,000 --
---------- ---------- ------------ ----------
Total costs and operating expenses . . . . . . . . . 2,281,936 1,576,378 8,262,536 5,211,399
---------- ---------- ------------ ----------
OPERATING INCOME (LOSS) . . . . . . . . . . . . . . . . (628,951) (14,009) (2,568,009) 241,621
NET INTEREST EXPENSE . . . . . . . . . . . . . . . . . 143,719 -- 431,157 --
---------- ---------- ------------ ----------
INCOME (LOSS) BEFORE INCOME TAXES . . . . . . . . . . . (772,670) (14,009) (2,999,166) 241,621
Income tax expense . . . . . . . . . . . . . . . . . -- -- 438,000 --
---------- ---------- ------------ ----------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS . . . . . (772,670) (14,009) (3,437,166) 241,621
---------- ---------- ------------ ----------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS . . . . . . 85,158 -- (732,585) --
---------- ---------- ------------ ----------
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT . . . . . -- -- -- 3,050,587
---------- ---------- ------------ ----------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . (687,512) (14,009) (4,169,751) 3,292,208
Dividends accrued on Preferred Stock, not yet paid . 19,606 -- 58,819 --
---------- ---------- ------------ ----------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK . . . . ($707,118) ($14,009) ($4,228,570) $3,292,208
========== ========== ============ ==========
Earnings (loss) per share:
Income (loss) before extraordinary items . . . . . . (0.95) -- (4.23) 0.04
Income (loss) from discontinued operations . . . . . 0.10 -- (1.91) --
Extraordinary gain on extinguishment of debt . . . . -- -- -- 0.53
---------- ---------- ------------ ----------
Net income (loss) . . . . . . . . . . . . . . . . . . (0.85) -- (5.14) 0.57
Dividends accrued on Preferred Stock, not yet paid . (0.02) -- 0.07 --
Net income (loss) attributable to Common Stock . . . ($0.87) $ -- ($5.21) $ 0.57
========== ========== ============ ==========
Common weighted shares outstanding . . . . . . . . . . 811,777 6,636,885 811,777 5,732,706
========== ========== ============ ==========
</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>
Nine Months Ended July 31,
--------------------------
1996 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ($3,482,239) $ 3,292,208
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 . . . . . . . . . . . . . . . . . . . . . . 318,000 198,500
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) 1,159,425
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,062 (221,052)
Income tax refunds receivable . . . . . . . . . . . . . . . . . . . . . . . . 124,045 --
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,787) 21,825
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . (56,905) 13,601
Checks written, not yet presented for payments . . . . . . . . . . . . . . . 91,407 --
Accounts payable, other accrued liabilities, and post retirement obligation. 1,145,163 (607,842)
------------ ------------
Net cash provided by (used in) operating activities . . . . . . . . . . . . ($765,971) $ 365,957
------------ ------------
INVESTING ACTIVITIES:
Additions to property and equipment . . . . . . . . . . . . . . . . . . . . . (8,796) --
------------ ------------
FINANCING ACTIVITIES:
Payments on subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . -- (2,025,965)
------------ ------------
DECREASE IN CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (774,767) (1,660,008)
Cash, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . 887,976 2,398,188
------------ ------------
Cash, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 113,209 $ 738,180
============ ============
CASH PAID DURING THE PERIOD FOR:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 695,490 $ --
============ ============
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ($129,069) ($1,300)
============ ============
NON CASH FINANCING ACTIVITIES:
Extinguishment of subordinated debt . . . . . . . . . . . . . . . . . . . . -- $ 4,054,035
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 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 July 31, 1997
there were no remaining subordinated notes.
As a result of this restructuring, the Company had, as of July 31, 1997,
paid $2,026,000 in cash, and had written off $404,000 of unamortized deferred
financing costs, $240,000 of accrued interest expense and $6,050,000 of its
long-term debt. The Company issued 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 an
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 July 31, 1997, and
for the three and nine month periods ended July 31, 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 July 31, Nine Months Ended July 31,
--------------------------- --------------------------
1996 1997 1996 1997
<S> <C> <C> <C> <C>
LIVESTOCK MARKETING
Operating Revenues . . . . . . . . . . . . . . . . . . $ 1,652,985 $ 1,562,369 $ 5,694,527 $ 5,453,020
Operating costs and expenses:
Direct operating costs and expenses . . . . . . . . . 1,519,764 1,441,933 5,023,463 4,723,587
Depreciation . . . . . . . . . . . . . . . . . . . . 99,600 57,500 339,600 191,000
------------ ------------ ------------ ------------
Total operating costs and expenses . . . . . . . . 1,619,364 1,499,433 5,363,063 4,914,587
------------ ------------ ------------ ------------
Operating income . . . . . . . . . . . . . . . . . . . 33,621 62,936 331,464 538,433
CORPORATE:
Costs and expenses:
General and administrative expenses . . . . . . . . . 223,572 74,445 817,473 289,312
Restructuring reserve and asset writedowns . . . . . 400,000 -- 1,965,000 --
Interest expense on long term debt . . . . . . . . . 143,719 -- 431,157 --
Amortization . . . . . . . . . . . . . . . . . . . . 39,000 2,500 117,000 7,500
------------ ------------ ------------ ------------
Total costs and expenses . . . . . . . . . . . . . 806,291 76,945 3,330,630 296,812
------------ ------------ ------------ ------------
Income (loss) before income tax . . . . . . . . . . . . (772,670) (14,009) (2,999,166) 241,621
Income tax expense . . . . . . . . . . . . . . . . . . -- -- 438,000 --
------------ ------------ ------------ ------------
Income (loss) from continuing operations before
extraordinary items . . . . . . . . . . . . . . . . (772,670) (14,009) (3,437,166) 241,621
Discontinued operations . . . . . . . . . . . . . . . . 85,158 -- (732,585) --
Extraordinary gain on extinguishment of debt . . . . . -- -- -- 3,050,587
------------ ------------ ------------ ------------
Net income (loss) . . . . . . . . . . . . . . . . . . . (687,512) (14,009) (4,169,751) 3,292,208
Dividends accrued on Preferred Stock, not yet paid . 19,606 -- 58,819 --
------------ ------------ ------------ ------------
Net income (loss) attributable to Common Stock . . . . ($707,118) ($14,009) ($4,228,570) $ 3,292,208
============ ============ ============ ============
CAPITAL EXPENDITURES:
Livestock marketing:
Additions (sales) of property and equipment . . . . . ($18,625) $ -- (9,829) $ --
============ ============ ============ ============
ANIMAL UNITS HANDLED . . . . . . . . . . . . . . . . . 211,953 184,873 747,900 651,255
============ ============ ============ ============
</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 nine months of
fiscal year 1997 were 12.9% lower than last year. 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.
Management judged that it was not economically prudent for the Company to
continue financing new cattle purchases. 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 July 31, 1997 there are no
remaining subordinated notes.
As a result of this restructuring, the Company had, as of July 31 1997,
paid $2,026,000 in cash, and had written off $404,000 of unamortized deferred
financing costs, $240,000 of accrued interest expense and $6,050,000 of its
long-term debt. The Company has also issued 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 July 31, 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.
On July 3, 1997 a tentative agreement with Central Livestock Association,
Inc. ("Central")was reached to sell the assets of the "River Markets" stockyard
facilities (Sioux Falls, Sioux City, Omaha, and St. Joseph). The company has
not recorded a writedown of assets as several contingencies with the sale still
exist. The tentative sale was announced to the public and employees on July
21, 1997. In early August a group of South Dakota businessmen approached the
Company indicating their desire to purchase substantially all of the common
shares of the Company. The Company is actively evaluating the proposed sale to
Central, the offer from the South Dakota businessmen and other alternatives to
determine which course of action would be in the best interests of the Company
and its shareholders. Among the alternatives currently under consideration is
a potential dissolution of the Company.
Comparison of the Third Quarter of Fiscal 1996 and the Third Quarter of Fiscal
1997
Livestock Marketing
Operating Revenues. For the three months ended July 31, 1997, the
Company's livestock marketing revenues, principally yardage and commission
revenues, were $1,562,369, a decrease of 5.5% from the $1,652,985 of such
business recorded in the comparable 1996 period. This decrease in revenues
relates primarily to a 12.8% reduction in the animal marketing units handled
from 211,953 for the third quarter of 1996 to 184,873 for the same period in
1997, principally due to the significant volume reduction at the Sioux City and
Omaha markets.
8
<PAGE> 9
PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Comparison of the Third Quarter of Fiscal 1996 and the Third Quarter of Fiscal
1997 (continued)
Livestock Marketing (continued)
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 third quarter of fiscal 1997, these costs and expenses totaled
$1,499,433, a decrease of 8.4% from the comparable figure of $1,619,364 in
1996, partially reflecting the decreased volume of business. Depreciation
expense decreased 43.3% from 99,600 in the third quarter of 1996 to $57,500 in
the third 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 $62,936 in the
third quarter of 1997 represented an increase of 87.2% from the $33,621 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 third quarter of 1997 were $76,945,
down 90.5% from the $806,291 of such costs recorded in the comparable period in
1996. General and administrative expenses for the third quarter of 1997
totaled $74,445 a decrease of 66.7% from the $223,572 of such costs reported in
1996. Included in the third quarter 1996 was a $400,000 litigation expense
charge. Interest expense (income) on long-term debt totaled $-0- 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 loss reported for the third
quarter 1997 from continuing operations was $14,009, compared to an operating
loss of $772,670 reported in 1996.
Discontinued Operations. Income from discontinued operations of $85,158 in
the third 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 third
quarters of 1997 or 1996.
Net Income (Loss); Net Income (Loss) Attributable to Common Stock. Net
loss reported for the third quarter of 1997 was $14,009, compared to a net loss
of $687,512 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 July 31, 1996. Dividends accumulated at a rate of $0.05 per
share per year. During the third quarter of 1996 the Company recorded $19,606
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 Nine Months Ended July 31, 1996 and the Nine Months Ended
July 31, 1997
Livestock Marketing
Operating Revenues. For the nine months ended July 31, 1997, the Company's
livestock marketing revenues, principally yardage and commission revenues, were
$5,453,020 down 4.2% from the $5,694,527 of such business recorded in the
comparable 1996 period. This decrease in revenues relates primarily to a 12.9%
reduction in the animal marketing units handled from 747,900 for the first nine
months of 1996 to 651,255 for the same period in 1997, principally due to
significant volume reduction at the Sioux City and Omaha markets.
9
<PAGE> 10
PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of the Nine Months Ended July 31, 1996 and the Nine Months Ended
July 31, 1997 (continued)
Livestock Marketing (continued)
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 third quarter of fiscal 1997, these costs and expenses totaled
$4,914,587, a decrease of 8.4% from 1996's comparable figure of $5,363,063,
partially reflecting a decreased volume of business. Depreciation expense
decreased 43.8% from $339,600 in 1996 to $191,000 in 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 $538,433 in 1997
represented an increase of 62.4% from the $331,464 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 nine months ended July 31, 1997 were
$296,812, down 90.9% from the $3,330,630 of such costs recorded in the
comparable period in 1996. General and administrative expenses for the nine
months ended July 31, 1997 totaled $289,312 a decrease of 64.6% from the
$817,473 of such costs reported in 1996. Included in the nine months ended
July 31, 1996 was a $1,965,000 restructuring expense and asset writedown
charge. Interest expense on long-term debt totaled $-0- in 1997 and $287,440
in 1996. Amortization expense was $7,500 in the nine months ended July 31,
1997 and $117,000 in 1996, as a result of the writeoff of the deferred
financing costs.
Income Taxes. The Company recorded no income tax expense during the nine
months ended July 31, 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 nine
months ended July 31, 1997 from continuing operations was $241,621, compared to
an operating loss of $3,437,166 reported in 1996.
Discontinued Operations. Loss from discontinued operations of $732,585 in
the nine months ended July 31, 1996 reflects management's decision to exit the
cattle finance business in the second quarter of 1996.
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:
Extinguishment of subordinated debt $ 6,050,000
Cash payments to former noteholders (2,025,965)
Writeoff of deferred bond costs (403,853)
Forgiveness of accrued interest 239,527
-----------
Subtotal 3,859,709
Conversion of debt to equity (749,122)
-----------
Extraordinary gain before tax 3,110,587
Taxes (60,000)
-----------
Net extraordinary gain $ 3,050,587
The Company estimates that taxes related to the extraordinary gain will be
minimal
10
<PAGE> 11
PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of the Nine Months Ended July 31, 1996 and the Nine Months Ended
July 31, 1997 (continued)
Net Income (Loss); Net Income (Loss) Attributable to Common Stock. Net
income reported for the first three quarters of 1997 was $3,292,208, compared
to a net loss of $4,169,751 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 July 31, 1996. Dividends accumulated at a rate of $0.05 per
share per year. During the first quarter of 1996 the Company recorded $58,819
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, July 31,
1996 1997 1996 vs. 1997
<S> <C> <C> <C>
Discontinued operations . . . . . . . . . . . . . 13.9% 0.0% N/A
Livestock Marketing:
Net identifiable assets . . . . . . . . . . . . 30.3 65.8 (0.3)
Corporate:
Cash . . . . . . . . . . . . . . . . . . . . . . 47.4 33.3 69.2
Other assets . . . . . . . . . . . . . . . . . . 8.4 0.9 (95.2)
Current liabilities . . . . . . . . . . . . . . 143.8 26.5 (54.4)
Long-term post retirement obligation . . . . . . 5.4 10.1 (14.6)
Common stockholder's equity (deficit) . . . . . . (49.2) 63.4 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
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 July 31, 1997 there are no remaining subordinated notes.
As a result of the settlement and exchange offer, the Company was 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 99% of
these shares had been issued as of August 14, 1997.
PART II, ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As a result of the settlement and exchange offer described in Item 2 above,
there are no remaining subordinated notes. As a consequence of the exchange of
all outstanding notes under the Indenture governing the notes, the prior
defaults under the Indenture described in previous filings on Form 10-QSB 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 July 31, 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: September 12, 1997 By:
------------------------ ------------------------------
Dean Bachelor
Chief Executive Officer
(Principal Executive Officer)
Dated: September 12, 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: September 12, 1997 By: /s/ Dean Bachelor
------------------------- ------------------------------
Dean Bachelor
Chief Executive Officer
(Principal Executive Officer)
Dated: September 12, 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 SERVICE CO. FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> JUL-31-1997
<CASH> 788,180
<SECURITIES> 0
<RECEIVABLES> 569,824
<ALLOWANCES> 32,884
<INVENTORY> 16,516
<CURRENT-ASSETS> 1,366,550
<PP&E> 6,544,865
<DEPRECIATION> 5,565,071
<TOTAL-ASSETS> 2,867,179
<CURRENT-LIABILITIES> 626,522
<BONDS> 0
0
0
<COMMON> 5,378,637
<OTHER-SE> (3,877,595)
<TOTAL-LIABILITY-AND-EQUITY> 2,367,179
<SALES> 5,453,020
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 4,293,992
<OTHER-EXPENSES> 917,407
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 241,621
<INCOME-TAX> 0
<INCOME-CONTINUING> 241,621
<DISCONTINUED> 0
<EXTRAORDINARY> 3,050,587
<CHANGES> 0
<NET-INCOME> 3,292,208
<EPS-PRIMARY> .57
<EPS-DILUTED> .57
</TABLE>
