Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
| (Mark One) | ||
|
þ
|
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the Quarterly period ended March 31, 2006 | ||
|
o
|
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT | |
| For the transition period from to |
Commission file number
Segmentz, Inc.
(Exact name of small business
issuer as specified in its charter)
| Delaware | 03-0450326 | |||
|
(State or other jurisdiction
of incorporation or organization) |
(I.R.S. Employer Identification No. |
) |
429 Post Road
P.O. Box 210
Buchanan, MI 49107
(Address of Principal Executive Offices)
P.O. Box 210
Buchanan, MI 49107
(Address of Principal Executive Offices)
(269) 695-4920
(Issuer’s Telephone Number, Including Area Code)
(Issuer’s Telephone Number, Including Area Code)
Indicated by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in
Rule 12b-2
of the Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ |
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The Registrant has 26,465,034 shares of its common stock
issued and 26,285,034 shares outstanding as of
April 24, 2006.
The Registrant has no shares of its preferred stock issued or
outstanding as of April 24, 2006.
Segmentz,
Inc.
Form 10-Q
Three Months Ended March 31, 2006 and 2005
(Unaudited)
Three Months Ended March 31, 2006 and 2005
(Unaudited)
1
Table of Contents
Part I — Financial
Information
|
March 31, |
December 31, |
|||||||
| 2006 | 2005 | |||||||
| (Unaudited) | ||||||||
|
ASSETS
|
||||||||
|
Current assets:
|
||||||||
|
Cash
|
$ | 255,000 | $ | 386,000 | ||||
|
Accounts receivable, net of
allowances of $744,000 and $732,000, respectively
|
4,683,000 | 4,434,000 | ||||||
|
Prepaid expenses
|
258,000 | 326,000 | ||||||
|
Other current assets
|
92,000 | 77,000 | ||||||
|
Deferred tax asset, current
|
500,000 | 500,000 | ||||||
|
Total current assets
|
5,788,000 | 5,723,000 | ||||||
|
Property and equipment, net of
accumulated depreciation
|
2,173,000 | 2,229,000 | ||||||
|
Goodwill
|
3,567,000 | 3,567,000 | ||||||
|
Identified intangible assets
|
4,520,000 | 4,629,000 | ||||||
|
Loans and advances
|
201,000 | 439,000 | ||||||
|
Deferred tax asset, long term
|
1,504,000 | 1,504,000 | ||||||
|
Other long term assets
|
379,000 | 363,000 | ||||||
| $ | 18,132,000 | $ | 18,454,000 | |||||
|
LIABILITIES AND
STOCKHOLDERS’ EQUITY
|
||||||||
|
Current liabilities:
|
||||||||
|
Accounts payable
|
$ | 1,459,000 | $ | 924,000 | ||||
|
Accrued salaries and wages
|
197,000 | 397,000 | ||||||
|
Accrued expenses, other
|
1,423,000 | 2,721,000 | ||||||
|
Current maturities of long term
debt
|
180,000 | 242,000 | ||||||
|
Other current liabilities
|
145,000 | 97,000 | ||||||
|
Total current liabilities
|
3,404,000 | 4,381,000 | ||||||
|
Line of credit
|
2,465,000 | 1,764,000 | ||||||
|
Notes payable and capital leases,
net of current maturities
|
184,000 | 824,000 | ||||||
|
Other long-term liabilities
|
207,000 | 199,000 | ||||||
|
Total long-term liabilities
|
2,856,000 | 2,787,000 | ||||||
|
Stockholders’ equity:
|
||||||||
|
Preferred stock, $.001 par
value; 10,000,000 shares no shares issued or outstanding
|
— | — | ||||||
|
Common stock, $.001 par
value; 100,000,000 shares authorized;
26,465,034 shares issued and 26,285,034 shares outstanding
|
26,000 | 26,000 | ||||||
|
Additional paid-in capital
|
20,341,000 | 20,312,000 | ||||||
|
Accumulated deficit
|
(8,388,000 | ) | (8,945,000 | ) | ||||
|
Treasury stock, at cost,
180,000 shares held
|
(107,000 | ) | (107,000 | ) | ||||
|
Total stockholders’ equity
|
11,872,000 | 11,286,000 | ||||||
| $ | 18,132,000 | $ | 18,454,000 | |||||
The accompanying notes are an integral part of the financial
statements.
2
Table of Contents
Segmentz,
Inc.
| Three Months Ended | ||||||||
|
March |
March |
|||||||
| 2006 | 2005 | |||||||
| (Unaudited) | ||||||||
|
Revenues
|
||||||||
|
Operating revenue
|
$ | 9,555,000 | $ | 10,349,000 | ||||
|
Expenses:
|
||||||||
|
Operating expenses
|
7,129,000 | 8,378,000 | ||||||
|
Gross profit
|
2,426,000 | 1,971,000 | ||||||
|
Sales, general and administrative
expense
|
1,721,000 | 3,009,000 | ||||||
|
Restructuring, exit and
consolidation expense
|
— | 3,583,000 | ||||||
|
Total sales, general and
administrative expense
|
1,721,000 | 6,592,000 | ||||||
|
Other expense
|
103,000 | 5,000 | ||||||
|
Interest Expense
|
45,000 | 24,000 | ||||||
|
Income (loss) before income tax
provision
|
557,000 | (4,650,000 | ) | |||||
|
Income tax (benefit) provision
|
— | — | ||||||
|
Net income (loss)
|
$ | 557,000 | $ | (4,650,000 | ) | |||
|
Basic earnings (loss) per common
share
|
0.02 | (0.17 | ) | |||||
|
Basic weighted average common
shares outstanding
|
26,285,034 | 26,705,309 | ||||||
|
Diluted earnings (loss) per common
share
|
0.02 | (0.17 | ) | |||||
|
Diluted weighted average common
shares outstanding
|
26,340,111 | 26,705,309 | ||||||
The accompanying notes are an integral part of the financial
statements.
3
Table of Contents
Segmentz,
Inc.
| Three Months Ended March 31, | ||||||||
| 2006 | 2005 | |||||||
| (Unaudited) | ||||||||
|
Operating Activities
|
||||||||
|
Net Income (loss) applicable to
stockholders
|
$ | 557,000 | $ | (4,650,000 | ) | |||
|
Adjustments to Reconcile Net
Income (Loss) to Net Cash from Operating Activities
|
||||||||
|
Provisions for allowance for
doubtful accounts
|
12,000 | 129,000 | ||||||
|
Depreciation &
amortization expense
|
259,000 | 447,000 | ||||||
|
Stock compensation expense
|
29,000 | — | ||||||
|
Loss on Forgiveness of Debt
|
90,000 | — | ||||||
|
Non-cash Impairment of intangible
assets
|
— | 3,303,000 | ||||||
|
Loss on Disposal of Equipment
|
17,000 | — | ||||||
|
Non-cash expenses relate to the
issuance of stock and warrants
|
— | 52,000 | ||||||
|
Changes in Assets and Liabilities
|
||||||||
|
Account Receivable
|
(261,000 | ) | 2,149,000 | |||||
|
Other Current Assets
|
(15,000 | ) | — | |||||
|
Prepaid Expenses and Other Current
Assets
|
68,000 | 452,000 | ||||||
|
Other Receivable
|
(2,000 | ) | (243,000 | ) | ||||
|
Other long-term Assets
|
(20,000 | ) | — | |||||
|
Accounts Payable
|
535,000 | (470,000 | ) | |||||
|
Accrued Salaries and Wages
|
(200,000 | ) | (232,000 | ) | ||||
|
Accrued expenses
|
161,000 | (110,000 | ) | |||||
|
Other liabilities
|
48,000 | (28,000 | ) | |||||
|
Total Adjustments
|
721,000 | 5,449,000 | ||||||
|
Net Cash provided by Operating
Activities
|
1,278,000 | 799,000 | ||||||
|
Investing Activities
|
||||||||
|
Payment of Acquisition Earn-out
|
(1,460,000 | ) | (1,460,000 | ) | ||||
|
Payment for Purchases of Property
and Equipment
|
(99,000 | ) | (31,000 | ) | ||||
|
Proceeds from Loans and Advances
|
150,000 | 1,000 | ||||||
|
Net Cash used by Investing
Activities
|
(1,409,000 | ) | (1,490,000 | ) | ||||
|
Financing Activities
|
||||||||
|
Credit Line, net
|
701,000 | 203,000 | ||||||
|
Payments of debt
|
(54,000 | ) | (95,000 | ) | ||||
|
Payment of mortgage
|
(647,000 | ) | — | |||||
|
Net Cash provided by Financing
Activities
|
— | 108,000 | ||||||
|
Decrease in cash
|
(131,000 | ) | (583,000 | ) | ||||
|
Cash at Beginning of Period
|
386,000 | 854,000 | ||||||
|
Cash at End of Period
|
$ | 255,000 | $ | 271,000 | ||||
|
Supplemental Disclosures of
Cash Flow Information
|
||||||||
|
Cash paid during the period for
interest
|
$ | 43,000 | $ | 22,000 | ||||
The accompanying notes are an integral part of the financial
statements.
4
Table of Contents
Segmentz,
Inc.
Three Months Ended March 31, 2006
|
Additional |
Accumulated |
|||||||||||||||||||||||||||
| Common Stock |
Paid In |
Earnings |
Treasury Stock | |||||||||||||||||||||||||
| Shares | Amount | Capital | (Deficit) | Shares | Amount | Total | ||||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||||||||
|
Balance December 31, 2005
|
26,465,034 | $ | 26,000 | $ | 20,312,000 | $ | (8,945,000 | ) | (180,000 | ) | $ | (107,000 | ) | $ | 11,286,000 | |||||||||||||
|
Net income
|
557,000 | 557,000 | ||||||||||||||||||||||||||
|
Stock based compensation
|
29,000 | 29,000 | ||||||||||||||||||||||||||
|
Balance March 31, 2006
|
26,465,034 | $ | 26,000 | $ | 20,341,000 | $ | (8,388,000 | ) | (180,000 | ) | $ | (107,000 | ) | $ | 11,872,000 | |||||||||||||
The accompanying notes are an integral part of the financial
statements.
5
Table of Contents
Notes to
Consolidated Financial Statements
Three Months Ended March 31, 2006 and 2005 (Unaudited)
Three Months Ended March 31, 2006 and 2005 (Unaudited)
| 1. | Significant Accounting Principles |
Basis
of Presentation
The accompanying unaudited condensed consolidated financial
statements of Segmentz Inc. (“we”, “us”,
“our” or the “Company”) have been prepared
pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC) and in accordance with the
instructions to
Form 10-Q.
Certain information and footnote disclosures normally included
in annual financial statements have been condensed or omitted
pursuant to those rules and regulations. However, we believe
that the disclosures contained herein are adequate to make the
information presented not misleading.
The financial statements reflect, in our opinion, all material
adjustments (which include only normal recurring adjustments)
necessary to fairly present our financial position at
March 31, 2006 and results of operations for the three
months ended March 31, 2006 and 2005.
These unaudited condensed consolidated financial statements and
notes thereto should be read in conjunction with the audited
financial statements and notes thereto for the fiscal year ended
December 31, 2005 included in our Annual Report on
Form 10KSB as filed with the SEC and available on the
SEC’s website www.sec.gov. Results of operations in
interim periods are not necessarily indicative of results to be
expected for a full year.
In conjunction with the preparation of these statements, the
Company evaluated its historical performance, as well as its
expected performance for the remainder of 2006 as a basis for
determining whether the Company should be considered to have
operational, liquidity and other concerns that might raise
doubts about it’s continuance and ability to meet future
financial obligations. Among the items considered in this
analysis were the historical losses, the significance of
restructuring charges, the completeness of the restructuring,
the historical performance of the Company’s expedited
(Express-1)
and dedicated operations and the availability and adequacy of
the Company’s liquidity and capital resources. In the
opinion of the Company’s management, based upon the above
analysis, the Company should be considered as a going concern.
Additional business risk factors have been outlined in the
Company’s annual report filed on
Form 10-KSB
and are available on both the Company’s
(www.express-1.com)
and SEC websites.
Stock-Based
Compensation
The Company has in place a stock option plan initially approved
by the shareholders for 600,000 shares of stock in November
2001 and later increased by the shareholders to
5,600,000 shares in June 2005. Through the plan, the
Company offers shares to employees and to assist in the
recruitment of qualified employees and non-employee directors.
Under the plan, the Company may also grant restricted stock
awards. Restricted stock represents shares of common stock
issued to eligible participants under the stock option plan
subject to the satisfaction by the recipient of certain
conditions and enumerated in the specific restricted stock
grant. Conditions that may be imposed include, but are not
limited to, specified periods of employment, attainment of
personal performance standards or the Company’s overall
financial performance.
Options generally become fully vested three to four years from
the date of grant and expire five years from the date of grant.
During the quarter ended March 31, 2006, we granted 625,000
options to purchase shares of common stock with a weighted
average grant date fair value of $0.18 per option. At
March 31, 2006, the Company had 2,874,000 shares
available for future stock option grants under existing plans.
Prior to January 1, 2006, we accounted for stock-based
compensation using the intrinsic value method and in accordance
with Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees and related
interpretations. In accordance with this previous guidance,
compensation expense related to stock option grants was recorded
on the date of the grant only if the current market price of the
underlying stock exceeded the exercise price. Under APB
No. 25, we recognized the cost of restricted stock over the
applicable vesting period. We had no restricted stock awarded
under our plan prior to January 1, 2006. Prior to
January 1, 2006, we did not
6
Table of Contents
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2006 and 2005
(Unaudited) — (Continued)
record compensation expense related to unexercised stock options
and provided pro forma disclosure amounts in our footnotes in
accordance with Statement No. 148, Accounting for
Stock-Based Compensation — Transition and
Disclosure.
Effective January 1, 2006, we adopted the provisions of
Statement of Financial Accounting Standards (“SFAS”)
No. 123(R), “Share-Based Payment.” Under the
modified prospective approach, SFAS 123(R) applies to new
awards granted subsequent to the date of adoption,
January 1, 2006. Compensation cost recognized during the
three months ended March 31, 2006 includes compensation
cost for all share-based payments granted prior to, but not yet
vested as of January 1, 2006, based on the grant date fair
value estimated in accordance with the original provisions of
SFAS 123, and compensation cost for all share based
payments granted subsequent to January 1, 2006, based on
the grant date fair value estimated in accordance with the
provisions of SFAS 123(R). Prior periods were not restated
to reflect the impact of adopting the new standard, and there is
no cumulative effect.
As a result of adopting SFAS 123(R), our income from
operations before taxes, net increase in net assets and basic
earnings per share for the three month period ended
March 31, 2006 were $29,000, $29,000, and $0.00 lower,
respectively, than if we had continued to account for stock
based compensation under APB Opinion No. 25 for our stock
option grants. Our diluted earnings per share for the quarter
ended March 31, 2006 did not change.
For the three months ended March 31, 2005, the following
table includes the disclosures required by Statement
No. 123R, and illustrates the proforma impact on net
earnings per share as if we had applied the fair value
recognition provision of Statement No. 123R.
|
Three Months Ended |
||||
| March 31, 2005 | ||||
|
Net loss as reported
|
$ | (4,650,000 | ) | |
|
Total stock-based employee
compensation included in reported net income applicable to
common stockholder, net of tax
|
— | |||
|
Total stock-based employee
compensation determined under fair value based method, net of
tax effects
|
(31,000 | ) | ||
|
Pro forma net loss
|
$ | (4,681,000 | ) | |
|
Basic loss per
share — as reported
|
$ | (0.17 | ) | |
|
Basic pro forma loss per share
|
$ | (0.18 | ) | |
|
Diluted loss per
share — as reported
|
$ | (0.17 | ) | |
|
Diluted pro forma loss per share
|
$ | (0.18 | ) | |
The weighted-average fair value of each stock option included in
the preceding pro forma amounts was estimated on the date of
grant using the Black-Scholes option pricing model and is
amortized over the vesting period of the underlying options. We
have used one grouping for the assumptions, as our option grants
are primarily basic with similar characteristics. The expected
term of options granted has been derived based upon the
Company’s history of actual exercise behavior and
represents the period of time that options granted are expected
to be outstanding. Historical data was also used to estimate
option exercises and employee terminations. Estimated volatility
is based upon the Company’s historical market price at
consistent points in a period equal to the expected
7
Table of Contents
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2006 and 2005
(Unaudited) — (Continued)
life of the options. The risk-free interest rate is based on the
U.S. Treasury yield curve in effect at the time of grant
and the dividend yield is zero. The following assumptions were
utilized:
| Three Months Ended March 31, | ||||||||
| 2006 | 2005 | |||||||
|
Risk-free interest rate
|
4.35 | % | 2.80 | % | ||||
|
Expected volatility
|
5.0 years | 5.0 years | ||||||
|
Expected volatility
|
53 | % | 35 | % | ||||
|
Expected dividend yield
|
none | none | ||||||
|
Grant date fair value
|
$0.18 | $ | 0.44 | |||||
The following table summarizes the stock option activity for the
quarter ended March 31, 2006:
|
Weighted Average |
||||||||||||
|
Weighted Average |
Remaining |
|||||||||||
| Shares | Exercise Price | Contractual Life | ||||||||||
|
Outstanding at beginning of period
|
13,126,950 | $ | 1.52 | $ | ||||||||
|
Warrants granted
|
— | — | ||||||||||
|
Warrants expired/cancelled
|
— | — | ||||||||||
|
Warrants exercised
|
— | — | ||||||||||
|
Options granted
|
625,000.00 | 1.19 | ||||||||||
|
Options expired/cancelled
|
100,000.00 | 1.40 | ||||||||||
|
Options exercised
|
— | — | ||||||||||
|
Outstanding at end of period
|
13,651,950 | $ | 1.50 | $ | 2.71 | |||||||
|
Outstanding exercisable at end of
period
|
11,073,915 | $ | 1.53 | $ | 3.34 | |||||||
As of March 31, 2006, there was approximately $312,000 of
unrecognized compensation cost related to non-vested share-based
compensation that is anticipated to be recognized over a
weighted average period of approximately 1.4 years.
Estimated compensation expense related to existing share-based
plans is $115,000 and $115,000 for the years ended
December 31, 2006 and 2007, respectively.
At March 31, 2006, the aggregate intrinsic value of shares
outstanding was $20,510,000 and the aggregate intrinsic value of
options exercisable was $16,929,000. No options were exercised
during the three-month period ended March 31, 2006. The
total fair value of options vested during the three months ended
March 31, 2006 was $29,000.
Use of
Estimates
The Company prepares its consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America. These principles require 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. The Company reviews its estimates, including but not
limited to; purchased transportation, recoverability of
long-lived assets, recoverability of prepaid expenses, valuation
of investments, allowance for doubtful accounts and expenses
associated with the exercise of stock options on a regular basis
and makes adjustments based on historical experiences and
existing and expected future conditions. These evaluations are
performed and adjustments are made as information is available.
Management believes that these estimates are reasonable;
however, actual results could differ from these estimates.
8
Table of Contents
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2006 and 2005
(Unaudited) — (Continued)
Income
Taxes
Taxes on income are provided in accordance with
SFAS No. 109, Accounting for Income Taxes.
Deferred income tax assets and liabilities are recognized for
the expected future tax consequences of events that have been
reflected in the consolidated financial statements. Deferred tax
assets and liabilities are determined based on the differences
between the book values and the tax basis of particular assets
and liabilities and the tax effects of net operating loss and
capital loss carry forwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in the tax rate is
recognized as income or expense in the period that included the
enactment date. A valuation allowance is provided to offset the
net deferred tax assets if, based upon the available evidence,
it is more likely than not that some or all of the deferred tax
assets will not be realized. There is an allowance recorded as
of March 31, 2006 of approximately $1,850,000 on deferred
tax assets.
Earnings
Per Share
Earnings per common share are computed in accordance with
SFAS No. 128, “Earnings Per Share,” which
requires companies to present basic earnings per share and
diluted earnings per share. Basic earnings per share are
computed by dividing net income by the weighted average number
of shares of common stock outstanding during the period. Diluted
earnings per common share are computed by dividing net income by
the combined weighted average number of shares of common stock
outstanding and dilutive options outstanding during the period.
For purposes of calculating earnings per share, the basic
weighted average number of shares was 26,285,034 and 26,705,309
for the three-month period ended March 31, 2006 and 2005.
The diluted weighted average number of shares outstanding was
26,340,111 and 26,714,504 for the three-month period ended
March 31, 2006 and 2005, respectively.
Common stock equivalents in the three-month period ended
March 31, 2005 were anti-dilutive due to the net losses
sustained by the Company during this period. As a consequence,
the diluted weighted average common shares outstanding for the
three-months ended March 31, 2005 was the same as the basic
weighted average common shares outstanding, for purposes of
calculating earning per share.
| 2. | Commitments and Contingencies |
Litigation
In the ordinary course of business, the Company may be a party
to a variety of legal actions. The Company does not anticipate
any of these matters or any matters in the aggregate to have a
materially adverse effect on the Company’s business or its
financial position or results of operations.
Regulatory
Compliance
The Company’s activities are regulated by state and federal
agencies under requirements that are subject to broad
interpretations. Among these regulations are limitations on the
hours-of-service
that can be performed by the Company’s drivers, limitations
on the types of commodities that can be hauled, limitations on
the gross vehicle weight for each class of vehicle utilized by
the company and limitations on the transit authorities within
certain regions. The Company cannot predict future changes to be
adopted by the regulatory bodies that could require changes to
the manner in which the Company operates.
| 3. | Debt |
Line
of Credit
In November 2005, the Company entered into an agreement with a
Michigan banking corporation (the “Bank”), under which
the Bank extended an asset-based line of credit to the Company,
through its wholly owned subsidiary,
Express-1,
Inc. with Segmentz acting as guarantor. Under the terms of the
agreement, Segmentz may draw down amounts under the facility not
to exceed $6.0 million in the aggregate, at interest rates
that are based
9
Table of Contents
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2006 and 2005
(Unaudited) — (Continued)
upon the Bank’s prime lending rate. The amount that may be
drawn at any time is limited to the lessor of the
$6.0 million limit or 80% of eligible accounts receivable,
plus $800,000, for pledged real property. Company assets pledged
as collateral for the borrowing base include accounts receivable
and real property located at 429 Post Road in Buchanan,
Michigan. As of March 31, 2006, availability under the
facility was approximately $1.5 million, with an applicable
rate of interest of approximately 7.50%. Rates of interest are
indexed quarterly, based upon the Company’s performance and
the Bank’s prime lending rate. The facility has a maturity
date of November 15, 2007.
Bank
Note
In April 2005, the Company entered into a mortgage with Fifth
Third Bank for approximately $680,000 related to the purchase of
real property located at 429 Post Road in Buchanan, Michigan.
The note had a ten-year amortization and bore interest at a
fixed rate of approximately 6%; with a final balloon payment for
all accrued interest and principal after five years.
In conjunction with the credit facility entered into in November
2005, the Company repaid and retired the mortgage note during
the first quarter of 2006, as part of the financing arranged
with its current Bank. The Company paid an early termination fee
of approximately $13,000 in conjunction with the retirement of
this note.
| 4. | Restructuring, Exit and Consolidation Expenses |
During the fourth quarter of 2004, shortly after the Express-1
acquisition was completed, the Company implemented a
restructuring plan aimed at optimizing performance in its call
center operations, consolidating duplicate functions from
several locations, eliminating unprofitable locations and
focusing the Company on providing premium transportation
services. Early in 2005, the Company’s Board of Directors
expanded the restructuring plan to include the elimination of
all non-expediting services and the elimination of excess
overhead costs, including the consolidation of the
Company’s administrative and management functions within
its Buchanan, Michigan location. The restructuring plan was
completed in the third quarter of 2005.
As a result of the restructuring plan, the Company incurred
$2,010,000 of non-cash impairment of intangibles, losses on the
sale and disposal of fixed assets totaling $968,000, write-offs
on uncollectable receivables of $310,000 and $295,000 of other
accruals and expenses associated with restructuring for the
three-month period ended March 31, 2005.
Future net lease obligations for closed facilities have been
estimated at approximately $182,000 over the next four years. At
March 31, 2006, one of the facilities was subleased and the
Company was continuing to explore early termination or sublease
opportunities for the remaining facilities.
| 5. | Notes Receivable |
In conjunction with its restructuring plan, the Company sold
assets in its Temple and Bullet operations in July and August of
2005, respectively. As a condition to these sales, the Company
granted working capital financing to the respective buyers of
these operations as well as extended equipment financing under
the agreements.
In the quarter ended March 31, 2006, the Company agreed to
accept the sum of $150,000 in full settlement of the notes
receivable from the purchasers of the Bullet operations. In
connection therewith, the Company recorded a one-time loss on
this settlement of $90,000. This amount is reflected in the
financial statements under the caption “Other
expenses.”
10
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| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Forward-Looking Statements. This
Form 10-Q
includes “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of
1934, as amended. All statements, other than statements of
historical facts, included or incorporated by reference in this
Form 10-Q
which address activities, events or developments which the
Company expects or anticipates will or may occur in the future,
including such things as future capital expenditures (including
the amount and nature thereof), finding suitable merger or
acquisition candidates, expansion and growth of the
Company’s business and operations, and other such matters
are forward-looking statements. These statements are based on
certain assumptions and analyses made by the Company in light of
its experience and its perception of historical trends, current
conditions and expected future developments as well as other
factors it believes are appropriate in the circumstances.
However, whether actual results or developments will conform
with the Company’s expectations and predictions is subject
to a number of risks and uncertainties, general economic market
and business conditions; the business opportunities (or lack
thereof) that may be presented to and pursued by the Company;
changes in laws or regulation; and other factors, most of which
are beyond the control of the Company.
This
Form 10-Q
contains statements that constitute “forward-looking
statements.” These forward-looking statements can be
identified by the use of predictive, future-tense or
forward-looking terminology, such as “believes,”
“anticipates,” “expects,”
“estimates,” “plans,” “may,”
“will,” or similar terms. These statements appear in a
number of places in this filing and include statements regarding
the intent, belief or current expectations of the Company, its
directors or its officers with respect to, among other things:
(i) trends affecting the Company’s financial condition
or results of operations for its limited history; (ii) the
Company’s business and growth strategies; (iii) the
Company’s ability to integrate the companies it has
acquired and, (iv) the Company’s financing plans.
Investors are cautioned that any such forward-looking statements
are not guarantees of future performance and involve significant
risks and uncertainties, and that actual results may differ
materially from those projected in the forward-looking
statements as a result of various factors. Factors that could
adversely affect actual results and performance include, among
others, the Company’s limited operating history, potential
fluctuations in quarterly operating results and expenses,
government regulation, technology change and competition.
Consequently, all of the forward-looking statements made in this
Form 10-Q
are qualified by these cautionary statements and there can be no
assurance that the actual results or developments anticipated by
the Company will be realized or, even if substantially realized,
that they will have the expected consequence to or effects on
the Company or its business or operations. The Company assumes
no obligations to update any such forward-looking statements.
Executive
Summary
Segmentz, Inc. (“we”, “us”, “our”
and the “Company”) operates as an expedited
transportation company. We provide expedited services to over
1,000 customers, specializing in time sensitive transportation
fulfilled through a variety of exclusive use vehicles, providing
reliable same day or high priority service between points within
the United States and parts of Canada. Our services include
expedited surface transportation, aircraft charters and
dedicated expedited delivery. Our vehicles classifications
include cargo vans, both 12 foot and 24 foot straight trucks and
tractor-trailers. We offer an ISO 9001:2000 certified,
twenty-four hour, seven day a week call center allowing our
customers immediate communication and status updates on time
sensitive shipments while in-transit. Our customers are provided
with electronic alerts, shipment tracking, proof of delivery
reconciliation, billing status and performance reports. We are
dedicated to providing premium services that are customized to
meet our client’s individual needs and flexible enough to
cope with an ever-changing business environment.
Our customers are supported through two primary service
locations. Our Express-1 expedited operations are located in
Buchanan, Michigan, while our dedicated expedited transportation
operations are located in Evansville, Indiana. The Express-1
operations have historically been profitable, while the
Evansville operations became profitable during 2005, in
conjunction with our restructuring efforts. These two expedited
operations are complementary and provide us with a core base of
focused transportation services, on which to build.
Express-1 specializes in time critical deliveries and offers a
variety of vehicle capacities, including vans, straight trucks
and semis. Using an asset-light model, Express-1 primarily
utilizes a fleet of independent contractors to provide
time-definite services throughout the United States and certain
provinces of Canada. Express-1 has been
11
Table of Contents
recognized for its excellence in customer service and acts as a
Tier 1 supplier to major automotive manufacturers as well
as servicing the needs of a diverse client base including a
number of Fortune 500 companies and third-party logistics
providers. Approximately 90% of our revenues are generated from
our Express-1 operations.
We operate a dedicated expedite service providing order
fulfillment for a major automotive manufacturer from its
Evansville, Indiana automotive parts distribution facility.
These services are provided through a fleet of company operated
trucks and trailers. The dedicated service contract extends
through April 2007. We are currently in discussions with our
primary customer in an effort to extend the contract for another
multi-year term. We are hopeful we will be able to conclude
these discussions, prior to the expiration of the current
contract. Approximately 10% of our revenues are generated from
our Evansville dedicated operations.
Our growth strategy calls for a focus on organic initiatives,
which we feel will continue to enhance both our top and bottom
lines. Through organic means, our management team anticipates we
will be able to increase our fleet capacity, expedited market
presence and geographic footprint. Complementing this internal
growth, we plan to entertain selective acquisitions on occasion,
to further support our expedited market focus.
Our board of directors, management team and employees are
focused on expanding our expedited operations. In support of
this strategy, we have asked for shareholder approval to change
our company name to Express-1 Expedited Solutions in conjunction
with our annual shareholder’s meeting. Express-1 has become
a recognized leader in the expedited transportation market since
its inception in 1989.
Restructuring
In 2004, shortly after the acquisition of Express-1, Inc., our
Board of Directors and management team implemented a
restructuring plan (the “Plan”) for our Company. The
Plan called for the closing of our unprofitable companies,
operations and locations. It also refocused our Company on our
profitable expedited transportation businesses. Throughout the
fall of 2004, we exited our
airport-to-airport
business and consolidated our Dasher business into our other
expediting operations. Continuing this restructuring activity in
2005, we exited our Tampa brokerage in addition to our Temple
and Bullet operations. We also completed the relocation of our
executive offices from Tampa, Florida to Buchanan, Michigan.
Due to the restructuring efforts, we were able to eliminate the
need for physical facilities in eighteen (18) locations,
thereby greatly reducing our overhead burden. Headcount was
reduced from a high of approximately 475 to approximately 125
employees at the conclusion of the restructuring period. The
table below outlines the restructuring charges recorded during
the quarter ended March 31, 2005. As previously stated, the
Company completed its restructuring activities in the third
quarter of 2005, and consequently no restructuring charges have
been recorded thereafter.
Segmentz
Restructuring Charges
|
For the |
||||||||
| Three-Months Ended | ||||||||
|
Classification
|
03/31/2006 | 03/31/2005 | ||||||
|
Writeoff of goodwill and
intangibles
|
$ | — | $ | 2,010,000 | ||||
|
Writeoff and impairment of assets
|
— | 968,000 | ||||||
|
Other restructuring expenses
|
— | 295,000 | ||||||
|
Writeoff of uncollectible accounts
|
— | 310,000 | ||||||
|
Restructuring charges
|
$ | — | $ | 3,583,000 | ||||
12
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Results
of Operations
Segmentz,
Inc. Operational Results
|
Three Months Ended |
||||||||||||||||
| March 31, | Percentage of Revenue | |||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
|
Revenues
|
$ | 9,555,000 | $ | 10,349,000 | 100.0 | % | 100.0 | % | ||||||||
|
Operating expenses
|
7,129,000 | 8,378,000 | 74.6 | % | 81.0 | % | ||||||||||
|
Gross Margin
|
2,426,000 | 1,971,000 | 25.4 | % | 19.0 | % | ||||||||||
|
Selling, general and
administrative expenses
|
1,721,000 | 3,009,000 | 18.0 | % | 29.1 | % | ||||||||||
|
Restructuring, exit and
consolidation expenses
|
— | 3,583,000 | 0.0 | % | 34.6 | % | ||||||||||
|
Income (Loss) from operations
|
705,000 | (4,621,000 | ) | 7.4 | % | (44.7 | )% | |||||||||
|
Interest and other income (expense)
|
(148,000 | ) | (29,000 | ) | (1.5 | )% | (0.3 | )% | ||||||||
|
Income before provision for taxes
|
557,000 | (4,650,000 | ) | 5.8 | % | (44.90 | )% | |||||||||
|
Provision for taxes
|
— | — | 0.0 | % | 0.0 | % | ||||||||||
|
Income (Loss) from operations
|
$ | 557,000 | $ | (4,650,000 | ) | 5.8 | % | (44.9 | )% | |||||||
For
the three months ended March 31, 2006 compared to the three
months ended March 31, 2005.
All results normally expressed in dollars have been rounded to
the nearest one thousand dollars, with the exception of earnings
per share data which is expressed in whole dollars and cents.
Comparisons of results for those line items that have been
rounded to the nearest one thousand dollars are approximate, to
the extent of rounding on those specific items.
Revenues decreased by $794,000, or 7.7%, to $9,555,000 for the
quarter ended March 31, 2006, as compared to $10,349,000
for the quarter ended March 31, 2005. The decrease in
revenue was primarily attributable to the cessation of
unprofitable operations in accordance with our restructuring
plan. For the first quarter of 2006 and 2005, revenue derived
from these ceased activities totaled approximately $0 and
$2,378,000, respectively. Revenue increased within our Express-1
operations by approximately $1,469,000 or 21.3% in the first
quarter of 2006 as compared to the same quarter in the prior
year. The increase in Express-1 revenue can be largely
attributed to an 7%increase in our average fleet-size of
independent contractors in the first quarter of 2006 as compared
to the same period in 2005. Supporting this increase in fleet
capacity has been an increase in overall demand for our
Express-1 expedited services, during the quarter. Revenue within
our Evansville dedicated operations increased by approximately
$115,000 or 10.8%. This increase is derived primarily from a
rate increase received in the second quarter of 2005 from our
primary contract customer in Evansville. To a lesser extent it
was associated with the introduction of some local freight
movements recently initiated from our Evansville operation.
Operating expenses, which consist primarily of payments for
trucking services provided by both independent contractors and
partner carriers, fuel, insurance, equipment costs and payroll
expenses decreased by $1,249,000 or 14.9%, to $7,129,000 for the
quarter ended March 31, 2006, compared to $8,378,000 for
the quarter ended March 31, 2005. As a percentage of
revenues, operating expenses decreased approximately 6.4% to
74.6% of related revenues for the three months ended
March 31, 2006, compared with 81.0% of associated revenues
for the same three-month period in the prior year. The decrease
in operating expenses resulted primarily from the disposition of
our unprofitable operations as outlined in our restructuring
plan. The decrease associated with these ceased operations
accounted for approximately 3.9 percentage points of this
6.4% decrease. Decreases in the expenses associated with our
Express-1 expedited operations contributed approximately 1% to
the 6.4% decrease in operating expenses in the first quarter of
2006 as compared to the first quarter of 2005. The Express-1
improvement was primarily attributable to a change in the amount
of compensation paid to independent contractors for services
performed on national sales accounts which was implemented in
the second quarter of 2005. Improvements associated with a
reduction in operating expenses within our Evansville dedicated
operation accounts for most of the remaining 1.5% reduction in
operating expenses as a percentage of revenue within the first
quarter of 2006 as
13
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compared to the first quarter of 2005. Our Evansville operations
benefited from the aforementioned rate increase, as well as some
reductions in equipment expenses due to better management of
repair costs.
Gross margin improved by $455,000 or 23.1% during the first
quarter of 2006 as compared to the same period in the prior
year. Gross margin for the quarter ended March 31, 2006 was
$2,426,000 as compared to $1,971,000 for the quarter ended
March 31, 2005. As a percentage of revenue, gross margin
improved by 6.3 percentage points to 25.4% of revenue for
the first quarter of 2006 as compared to 19.0% of revenue in the
same quarter in 2005. The improvement in margin is primarily
related to the disposition of unprofitable operations in
connection with our restructuring plan. Complementing this
improvement, were slight improvements in the margin within our
Express-1 and Evansville dedicated operations associated with
rate improvements and cost reductions, as previously mentioned.
Sales, general and administrative (SG&A) expense decreased
by $4,871,000 or 73.9% to $1,721,000 for the quarter ended
March 31, 2006 compared to $6,592,000 for the quarter ended
March 31, 2005. SG&A expenses included approximately
$3,583,000 of identified restructuring costs in the first
quarter of 2005. As a percentage of revenue, SG&A expenses,
exclusive of restructuring charges, represented 18.0% of revenue
in the quarter ended March 31, 2006 compared to 29.1% of
revenues for the same quarter of 2005. Restructuring charges
represented approximately 34.6% of revenue in the first quarter
of 2005. The decrease in revenue has resulted from the
culmination of our successful restructuring efforts. Included
within the restructuring activities were the closing of
approximately 18 locations, a reduction in headcount by
approximately 350 employees, the elimination of corporate
offices in Tampa Florida and a streamlining of our expenses
associated with ongoing activities. Our management believes
SG&A, as a percentage of revenue, has normalized at a
sustainable level, barring any unforeseen events and slight
seasonal fluctuations. In the future, SG&A expenses should
increase at a slower rate than anticipated increases in revenue
and operating expenses, according to our anticipated operational
model.
Interest charges and other expenses increased $119,000 to
$148,000 during the first quarter of 2006, as compared to
$29,000 during the first quarter of 2005. The increase was
primarily attributable to a write-off, within the first quarter
of 2006, of approximately $90,000 associated with a notes
receivable originating from the sale of our Bullet operations.
During the first quarter of 2006, we also recorded approximately
$13,000 in charges related to the satisfaction of a mortgage
note on our Buchanan, Michigan property.
Income from operations was $705,000 for the quarter ended
March 31, 2006 compared to a loss from operations of
$4,621,000 for the quarter ended March 31, 2005. The
improvement is primarily associated with the disposition of our
unprofitable business operations in conjunction with our
restructuring efforts. Complementing this were increases in
revenue associated with rate increases in our Express-1 and
Evansville operations, coupled with reductions in direct and
SG&A expenses in these same operations.
There was no tax provision recorded for the quarter ended
March 31, 2006 and no tax benefit recorded for the quarter
ended March 31, 2005. The lack of tax provision in the
first quarter of 2006 is due primarily to the magnitude of
historical losses. The lack of tax benefit in the first quarter
of 2005 was due to the significance of net operating losses in
the preceding quarters. Future profitability will be monitored
to reassess the deferred tax asset and related allowance and to
determine the appropriate tax provision for future periods. We
anticipate recording a small amount of tax expense in 2006, due
to limitations on the amount of net operating loss
carry-forwards that can be used to offset federal Alternative
Minimum Tax. We anticipate being able to reduce approximately
90% of Alternative Minimum Tax during 2006, by utilizing net
operating loss carry-forwards.
Net Income for the quarter ended March 31, 2006 was
$557,000 as compared to a net loss of $4,650,000 for the quarter
ended March 31, 2005. As previously mentioned, the change
in net income resulted primarily from the successful completion
of our restructuring efforts. Complementing this change were
improvements in the profitability of our remaining expedited
operations.
Basic and diluted income per share for the quarter ended
March 31, 2006 was $0.02, compared with basic and diluted
loss per share of $0.17 for the three-month period ended
March 31, 2005. The shares used in the calculation of
diluted loss per share was equivalent to those used in the
calculation of the basic loss per share in the quarter ended
March 31, 2005, as common stock equivalents were
anti-dilutive for the quarter then ended.
14
Table of Contents
Critical
Accounting Policies
Principles
of Consolidation
The accompanying consolidated financial statements include the
accounts of Segmentz, Inc. and all of its wholly-owned
subsidiaries. All significant inter-company balances and
transactions have been eliminated in consolidation. The Company
does not have any variable interest entities whose financial
results are not included in the consolidated financial
statements.
Use of
Estimates
The Company prepares its consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America. These principles require 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 consolidated financial
statements and the reported amounts of revenues and expenses
during the reporting period. The Company reviews its estimates,
including but not limited to, purchased transportation,
recoverability of long-lived assets, recoverability of prepaid
expenses, valuation of investments, allowance for doubtful
accounts and amounts of stock compensation expense associated
with certain stock options, on a regular basis and makes
adjustments based on historical experiences and existing and
expected future conditions. These evaluations are performed and
adjustments are made as information is available. Management
believes that these estimates are reasonable and have been
discussed with the audit committee; however, actual results
could differ from these estimates.
Concentration
of Risk
Financial instruments, which potentially subject us to
concentrations of credit risk, are cash and cash equivalents and
accounts receivables.
The majority of cash is maintained with a Michigan financial
institution. Deposits with this bank may exceed the amount of
insurance provided on such deposits. Generally, these deposits
may be redeemed upon demand, and, therefore, bear minimal risk.
Concentration of credit risk with respect to trade receivables
is limited due to our large number of customers and wide range
of industries and locations served. No customer comprised more
than ten percent of the March 31, 2006 and 2005 customer
accounts receivable balance.
We receive a significant portion of our revenue from the
customers who operate within the U.S. domestic automotive
industry. Accordingly, our accounts receivable are comprised of
a large aggregate concentration of accounts from within this
industry. Recently, the U.S. automotive industry has been
in decline according to reports in various media sources. In the
event of further financial erosion by any of the “Big
Three” domestic automotive manufacturers, the effect on our
Company could be materially adverse. Further, the weakening of
any of the domestic automotive manufacturers can have an adverse
effect on a significant portion of our customer base which is
comprised in large part by manufacturers and suppliers for the
automotive industry.
We extend credit to various customers based on an evaluation of
the customer’s financial condition and their ability to pay
in accordance with our payment terms. We provide for estimated
losses on accounts receivable considering a number of factors,
including the overall aging of accounts receivables, customers
payment history and the customer’s current ability to pay
its obligation. Based our managements’ review of accounts
receivable and other receivables, an allowance for doubtful
accounts of approximately $744,000 and $550,000 is considered
necessary as of March 31, 2006 and 2005, respectively.
Although we believe our account receivables are recorded at
their net realizable value, a decline in our historical
collection rate could have a materially adverse affect on our
operations and net income. We do not accrue interest on past due
receivables.
Contingent
Liabilities
The Company is party to legal actions, which are not material to
operations pursuant to Item 103 of
Regulation S-K.
15
Table of Contents
EBITDA
EBITDA for the three months ended March 31, 2006 was
positive $861,000 compared to negative $596,000 in the
comparable period of the prior year. We define EBITDA as
earnings before interest, taxes, depreciation and amortization.
In addition, we exclude from our EBITDA calculation the
cumulative effect of a change in accounting principle,
discontinued operations, and the impact of restructuring and
certain other charges, and include in the EBITDA calculation
selected financial data related to various Company acquisitions.
A reconciliation of EBITDA to the most directly comparable GAAP
financial measure is set forth herein.
SELECTED
FINANCIAL DATA
For
the three months ended March 31, 2006
|
Evansville |
Core |
|||||||||||||||||||||||||||
| Express-1 | Dedicated | Corporate | Business | Other | Segmentz, Inc. | |||||||||||||||||||||||
|
Operating Revenues
|
$ | 8,376,000 | $ | 1,179,000 | $ | — | $ | 9,555,000 | $ | — | $ | 9,555,000 | ||||||||||||||||
|
Operating Expenses
|
6,090,000 | 991,000 | — | 7,081,000 | 48,000 | 7,129,000 | ||||||||||||||||||||||
|
Sales, general and administrative
expenses(1)
|
1,353,000 | 160,000 | 346,000 | 1,859,000 | 10,000 | 1,869,000 | ||||||||||||||||||||||
|
Restructuring expenses
|
— | — | — | — | — | — | ||||||||||||||||||||||
|
Net income (loss) before provision
(benefit) for taxes
|
$ | 933,000 | $ | 28,000 | $ | (346,000 | ) | $ | 615,000 | $ | (58,000 | ) | $ | 557,000 | ||||||||||||||
|
Restructuring expenses
|
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
|
Depreciation and amortization
|
212,000 | 47,000 | — | 259,000 | — | 259,000 | ||||||||||||||||||||||
|
Interest expense, net
|
— | — | 45,000 | 45,000 | — | 45,000 | ||||||||||||||||||||||
|
Taxes
|
— | — | — | — | — | — | ||||||||||||||||||||||
|
EBITDA
|
$ | 1,145,000 | $ | 75,000 | $ | (301,000 | ) | $ | 919,000 | $ | (58,000 | ) | $ | 861,000 | ||||||||||||||
| (1) | For the purpose of calculating EBITDA, approximately $148,000 of “Interest and other income and expense” has been classified within the line item “Selling, general and administrative expenses.” |
The selected data represents “reporting units” within
the Company and are primarily allocated based on acquisitions,
which is the basis for their respective earn-out provisions. The
subtotal entitled “Core Business” represents the
operations remaining after the completion of the restructuring
plan, and is intended only to give the reader the ability to
view what are now our ongoing operations, exclusive of the
closed operations. The column entitled “Other”
represents services or location revenue and expenses that has
primarily been eliminated based on the restructuring plan
implemented in the fourth quarter of 2004. Remaining expenses
within the column “Other” include real estate leases,
equipment termination costs and impairment charges associated
with equipment and property no-longer in use. None of our
reporting units met the quantitative criteria in 2006 or 2005
required for segment reporting.
USE OF
GAAP AND NON-GAAP MEASURES
In addition to results presented in accordance with generally
accepted accounting principles (“GAAP”), we have
included in this report earnings “EBITDA” with EBITDA
being defined as earnings before interest, taxes, depreciation
and amortization and excluding the cumulative effect of a change
in accounting principle, discontinued operations, and the impact
of restructuring and other charges. We have also included some
selected financial data related to the various acquisitions and
operating locations. For each non-GAAP financial measure, we
have presented the most directly comparable GAAP financial
measure and reconciled the non-GAAP financial measure with such
comparable GAAP financial measure.
These non-GAAP financial measures provide useful information to
investors to assist in understanding the underlying operational
performance of our company. Specifically, EBITDA is a useful
measure of operating performance before the impact of investing
and financing transactions, making comparisons between
companies’ earnings power more meaningful and providing
consistent
period-over-period
comparisons of our Company’s
16
Table of Contents
performance. In addition, we use these non-GAAP financial
measures internally to measure our on-going business performance
and in reports to bankers to permit monitoring of our ability to
pay outstanding liabilities. The table below reconciles our
non-GAAP measure EBITDA to our most closely related GAAP
financial measure.
Segmentz,
Inc. EBITDA Reconciliation
|
Three Months Ended |
||||||||
| March 31, | ||||||||
| 2006 | 2005 | |||||||
|
Net income (loss) as reported
|
$ | 557,000 | $ | (4,650,000 | ) | |||
|
Income tax (benefit) provision
|
$ | — | $ | — | ||||
|
Interest expense
|
$ | 45,000 | $ | 24,000 | ||||
|
Depreciation and amortization
|
$ | 259,000 | $ | 447,000 | ||||
|
Restructuring, exit and
|
$ | — | $ | 3,583,000 | ||||
|
EBITDA
|
$ | 861,000 | $ | (596,000 | ) | |||
Liquidity
and Capital Resources
Cash
Flow
As of March 31, 2006 we have approximately $2,384,000 of
working capital with associated cash and cash equivalents of
approximately $255,000, compared with working capital of
approximately $1,342,000 and cash of approximately $386,000 at
December 31, 2005.
During the three-month period ended March 31, 2006 cash has
decreased by approximately $131,000. During the same period we
generated operational income of approximately $1,278,000 and
completed payments related to previous acquisitions of
approximately $1,460,000. Other sources and uses of cash
include: (i) a use for purchases of equipment of
approximately $99,000; and (ii) a source via the receipt of
repayment on the Bullet loans of $150,000.
Liquidity
In conjunction with the preparation of these statements and to
further analyze the ability of our operations to generate future
operating cash flow, we evaluated our historical performance, as
well as our expected performance for the remainder of 2006, as a
basis for determining whether our Company should be considered
to have operational, liquidity and other concerns that might
raise doubts about our continuance and ability to meet future
financial obligations. Among the items considered in this
analysis were the historical losses, the significance of the
restructuring charges, the completeness of the restructuring,
the historical performance of our remaining expedited operations
and the availability and adequacy of our liquidity and capital
resources. In the opinion of our management, based upon the
above analysis, our Company should be considered as a going
concern.
To ensure that our Company has adequate near-term liquidity, we
have in place a $6.0 million line of credit facility with a
Michigan banking corporation (the “Bank”). The line of
credit calls for our operating subsidiary, Express-1 to be the
borrower and Segmentz to act as guarantor. Under the loan
documents, Express-1 may draw down under the line of credit the
lesser of $6,000,000 or 80% of the eligible accounts receivable
of Express-1, Inc, plus $800,000. The additional $800,000 is
available based upon the granting of a security interest in our
Buchanan, Michigan facility, which was completed in the first
quarter of 2006. All obligations of Express-1 under the
agreements are secured by the accounts receivable of Express-1,
Inc. All advances under the agreement are subject to interest at
the rate of the Bank’s prime plus an applicable margin that
ranges from negative 0.50% to positive 0.25% based upon the
Company’s performance in the preceding quarter. Interest is
payable monthly. The maturity date of the loan is
November 15, 2007. The credit facility contains various
covenants pertaining to the maintenance of certain financial
ratios. As of March 31, 2006, we have available borrowing
capacity of approximately $1.5 million, and an effective
interest rate of (prime minus one-quarter percent) 7.5%. The
Bank facility retired an existing facility with another banking
corporation.
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The Bank facility also permits the issuance of letters of credit
as security for the Company’s obligations and contingent
obligations. As of March 31, 2006, we had outstanding
letters of credit totaling $400,000, issued primarily for
deductibles for various insurance policies. The total of these
letters of credit has reduced the above described borrowing
capacity by an equal amount.
We may receive proceeds in the future from the exercise of
warrants and options outstanding as of March 31, 2006 in
accordance with the following schedule:
|
Approximate |
||||||||
|
Number of |
Approximate |
|||||||
|
Shares
|
Proceeds | |||||||
|
Total options and warrants
outstanding
|
13,652,000 | $ | 20,510,000 | |||||
We will be required to make significant payments in the future
if the contingent consideration installments under our various
acquisitions become due. While we believe that a significant
portion of the required payments will be generated by our
operations, we may have to secure additional sources of capital
to fund some portion of the contingent consideration payments as
they become due. This presents our Company with certain business
risks relative to the availability and pricing of future fund
raising, as well as the potential dilution of our stockholders
equity, if the fund raising involves the sale of equity.
These contingent consideration amounts are tied directly to
divisional performance of the respective entities, mitigating
some of the risks that might exist for contingent payments tied
to other performance indicators. The table below reflects the
possible contingent consideration that we could pay over the
next two years if certain criteria related to the acquired
entities is obtained:
|
Possible |
||||
|
Year Ending
December 31,
|
Payments | |||
|
2007
|
$ | 1,960,000 | ||
|
2008
|
$ | 2,210,000 | ||
|
Total
|
$ | 4,170,000 | ||
From time to time we are named as a defendant in legal
proceedings. There is the possibility that we could incur
material expenses in the defense and resolution of legal
matters. Furthermore, since we have not established material
reserves in connection with such claims, any such liability,
would be recorded as an expense in the period incurred or
estimated. This amount, even if not material to our overall
financial condition, could adversely affect our results of
operations in the period recorded.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Market risk generally represents the risk of loss that may
result from the potential change in value of a financial
instrument as a result of fluctuations in interest rates and
market prices. We do not currently have any trading derivatives
nor do we expect to have any in the future. We have established
policies and internal processes related to the management of
market risks, which we use in the normal course of our business
operations.
Interest
Rate Risk
We have interest rate risk, in that borrowings under our credit
facility are based on variable market interest rates. As of
March 31, 2006, we had $2.4 million of variable rate
debt outstanding under our credit facility. Presently, the
revolving credit line bears interest at a rate of between prime
minus 0.50% to prime plus 0.25%, depending on our performance,
with a maturity date of November 15, 2007. A hypothetical
10% increase in our credit facility’s weighted average
interest rate of 7.5% per annum for the twelve months ended
December 31, 2006 would correspondingly decrease our
earnings and operating cash flows by approximately $18,000 and
$18,000.
Intangible
Asset Risk
We have a substantial amount of intangible assets. We are
required to perform goodwill impairment tests whenever events or
circumstances indicate that the carrying value may not be
recoverable from estimated future
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cash flows. As a result of our periodic evaluations, we may
determine that the intangible asset values need to be written
down to their fair values, which could result in material
charges that could be adverse to our operating results and
financial position. Although at March 31, 2006 we believed
our intangible assets were recoverable, changes in the economy,
the business in which we operate and our own relative
performance could change the assumptions used to evaluate
intangible asset recoverability. We continue to monitor those
assumptions and their effect on the estimated recoverability of
our intangible assets.
Equity
Price Risk
We do not own any equity investments, other than in our
subsidiaries. As a result, we do not currently have any direct
equity price risk.
Commodity
Price Risk
We do not enter into contracts for the purchase or sale of
commodities. As a result, we do not currently have any direct
commodity price risk.
| Item 4. | Controls and Procedures. |
Evaluation of disclosure controls and
procedures. Under the supervision and with the
participation of the Company’s management, including the
Company’s principal executive officer and principal
financial officer, the Company conducted an evaluation of the
effectiveness of the design and operations of its disclosure
controls and procedures, as such term is defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), as of the end of the period covered
by this report. Based on their evaluation, our principal
executive officer and principal financial officer concluded that
our disclosure controls and procedures were effective such that
the material information required to be included in our
Securities and Exchange Commission (“SEC”) reports is
recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms relating to Segmentz,
Inc., including our consolidated subsidiaries, and was made
known to them by others within those entities, particularly
during the period when this report was being prepared.
Changes in internal controls. There were no
changes in our internal controls over financial reporting during
the last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal controls
over financial reporting.
19
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PART II — OTHER
INFORMATION
| Item 1. | Legal Proceedings. |
From time to time, the Company is involved in various civil
actions as part of its normal course of business. The Company is
not party to any litigation that is material to ongoing
operations as defined in Item 103 of
Regulation S-K
as of the period ended March 31, 2006.
| Item 1A. | Risk Factors |
You should refer to Item 101 of our annual report
(Form 10KSB) for the year ended December 31, 2005,
under the caption “RISKS PARTICULAR TO THE COMPANY’S
BUSINESS” for specific details on the following factors and
events that are not within our control and could affect our
financial results.
| • | We have a large concentration of customer accounts from our largest customers, and to a significant degree are reliant on the U.S. automotive industry. A loss of one or more of our largest customers, or a decline in the financial health of companies engaged within the U.S. automotive industry could materially impact our financial results. | |
| • | We have historically experienced losses from our operations, there can be no assurance that we will be able to generate sufficient revenue to meet our expenditures or operate profitably in the future. | |
| • | We are subject to economic risk factors associated with the business of transportation and logistics management; changes in these risk factors could negatively impact our financial results and ability to operate profitably. | |
| • | We are dependent on third parties, including independent contract drivers and other transportation companies, to provide equipment to service our customers. Interruption on the supply or willingness of these third parties to provide transportation for our accounts, could materially negatively impact our financial results. | |
| • | We are reliant upon the expedited transportation industry and customers who seek this form of transportation. A change in preference by these customers away from expedited delivery could have a materially adverse impact on our earnings and results of operations. | |
| • | Our business could be materially negatively impacted by a response to terrorist activities within the United States or regulations of restrictions to the flow of transportation goods and services in response to terrorists. | |
| • | We face competition from various sources, including some very large well-capitalized companies. Changes within the competitive landscape could have a material adverse impact on our business. | |
| • | Our operations and industry is subject to various regulations and is licensed by various U.S. and Canadian agencies. Changes in these regulations or licensing requirements could limit, restrict or reduce our ability to continue to operate our business and negatively impact our business to a material extent. | |
| • | We have historically realized a significant rate of revenue growth within our remaining operations, primarily Express-1. There can be no assurances that we will be able to sustain these growth rates or that we will not experience periods of negative growth in the future. | |
| • | There can be no assurance that our current business or revenue model will continue to be successful in future periods. | |
| • | We have not historically been successful in buying and integrating some of our previous acquisitions. There can be no assurance that we will be able to successfully purchase or integrate future acquisition candidates. | |
| • | There can be no assurance that we will be able to manage future growth and internal expansion. | |
| • | We are dependent upon employee drivers who operate our equipment and independent contractors who both provide and operate their own equipment in support of our operations. There can be no assurance that we will be able to continue to attract and retain drivers and contractors in the future. |
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| • | We are reliant on key personnel to manage our operations and business activities, there can be no assurance that we will be able to retain these key personnel or attract qualified replacements in the event of loss of key management. | |
| • | We maintain insurance policies, which contain policy limits and deductibles. There can be no assurance that we will not experience claims in a frequency that exceeds our ability to absorb related deductibles. There can be no assurance that we will not experience claims that exceed our policy limits for which we would be responsible and for which the magnitude of the claim would impact our financial results in a materially adverse manner. There can be no assurance that we have now or will maintain insurance coverage for all risks for which we may be found liable. | |
| • | We are dependent upon fuel to operate our equipment and the equipment of our independent contract drivers. We maintain fuel surcharges that assist in offsetting the volatility in fuel prices. There can be assurances that future changes in the price or availability of fuel will not have a material adverse affect on our operations. There can be no assurance that we will be successful in the future at passing increases of the price of fuel along to our customers. | |
| • | We may need substantial financing in future periods. There can be no assurance that we will be able to obtain financing or obtain financing on terms that are favorable to our company and its financial results. | |
| • | The market price of our common stock may be volatile, which could cause the value of your investment to decline. |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None
| Item 3. | Defaults upon Senior Securities. |
The Company’s line of credit contains various covenants
pertaining to the maintenance of certain financial ratios. As of
March 31, 2006, the Company was in compliance with the
ratios required under its revolving credit agreement. No events
of default exist on the credit facility, as of the filing date.
| Item 4. | Submission of Matters to a Vote of Security Holders. |
No matters were submitted to the shareholders for voting during
the three-month period ended March 31, 2006.
| Item 5. | Other Information. |
None
| Item 6. | Exhibits |
| 31 | .1 | Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 31 | .2 | Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 32 | .1 | Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (This exhibit shall not be deemed ‘‘filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.) | ||
| 32 | .2 | Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (This exhibit shall not be deemed ‘‘filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.) |
21
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SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Segmentz, Inc.
|
/s/ Mike
Welch
|
Mike Welch
Chief Executive Officer
/s/ Mark
Patterson
Mark Patterson
Chief Financial Officer
Date May 12, 2006
22
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Exhibit Index
| Exhibit No. | Description | |||
| 31 | .1 | Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 31 | .2 | Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 32 | .1 | Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (This exhibit shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.) | ||
| 32 | .2 | Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.) | ||
EXHIBIT 31.1 I, Mike Welch, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Segmentz, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 12, 2006 /s/ Mike Welch - -------------------------------- Chief Executive Officer
EXHIBIT 31.2 I, Mark Patterson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Segmentz, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 12, 2006 /s/ Mark Patterson - -------------------------------- Chief Financial Officer
EXHIBIT 32.1 WRITTEN STATEMENT OF THE CHIEF EXECUTIVE OFFICER Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley act of 2002 Solely for the purposes of complying with 18 U.S.C. s.1350 as adopted pursuant to section 906 of the Sarbanes-Oxley act of 2002, I, the undersigned Chief Executive Officer of Segmentz, Inc. (the "Company"), hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2006, (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 12, 2006 By: /s/ Mike Welch -------------------------------------- Chief Executive Officer
EXHIBIT 32.2 WRITTEN STATEMENT OF THE CHIEF FINANCIAL OFFICER Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley act of 2002 Solely for the purposes of complying with 18 U.S.C. s.1350 as adopted pursuant to section 906 of the Sarbanes-Oxley act of 2002, I, the undersigned Chief Financial Officer of Segmentz, Inc. (the "Company"), hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2006, (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 12, 2006 By: /s/ Mark Patterson ----------------------------------------- Chief Financial Officer