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