FORM 10-Q
________________________________________________
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003.
Commission File No. 1-8129.
US 1 INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Indiana 95-3585609
(State of Incorporation) (I.R.S. Employer Identification No.)
1000 Colfax, Gary, Indiana 46406
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (219) 977-5225
Indicate 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 _X_ No ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes ___ No _X_
As of August 13, 2003, there were 11,618,224 shares of registrant's common stock
outstanding.
US 1 INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 (UNAUDITED) AND DECEMBER 31, 2002
Part I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
ASSETS
June 30, December 31,
2003 2002
(Unaudited)
CURRENT ASSETS:
Cash $ 0 $ 0
Accounts receivable-trade, less allowance for
doubtful accounts of $766,000 and $460,000
respectively 17,721,032 16,468,912
Other receivables, including receivables due
from affiliated entities of $32,000 and
$261,000, respectively 1,561,351 1,648,599
Deposits 50,400 45,200
Prepaid expenses 513,635 473,174
Current deferred tax asset 600,000 600,000
----------- ----------
Total current assets 20,446,418 19,235,885
FIXED ASSETS:
Equipment 1,778,186 1,669,781
Less accumulated depreciation and amortization (657,764) (512,406)
----------- ----------
Net fixed assets 1,120,422 1,157,375
----------- -----------
ASSETS HELD FOR SALE:
Land 195,347 195,347
Valuation allowance (141,347) (141,347)
----------- -----------
Net assets held for sale 54,000 54,000
Non-current deferred tax asset 600,000 600,000
Other Assets 397,745 396,527
----------- -----------
TOTAL ASSETS $22,618,585 $21,443,787
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
US 1 INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 (UNAUDITED) AND DECEMBER 31, 2002
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, December 31,
2003 2002
(Unaudited)
CURRENT LIABILITIES:
Revolving line of credit $ 6,581,651 $ 6,118,480
Current portion of long-term debt 830,203 1,197,667
Accounts payable 6,155,555 5,627,909
Accrued expenses 360,638 403,296
Insurance and claims 754,580 1,044,222
Accrued compensation 30,788 87,273
Accrued interest 1,086,202 1,009,394
Fuel and other taxes payable 86,901 81,714
Accrued Legal Settlement 700,000 700,000
----------- ------------
Total current liabilities 16,586,518 16,269,955
----------- ------------
LONG-TERM DEBT (primarily to related parties) 2,925,508 3,113,653
Minority Interest 189,489 202,751
REDEEMABLE PREFERRED STOCK:
Authorized 5,000,000 shares; no par value
SHAREHOLDERS' EQUITY:
Common stock, authorized 20,000,000 shares;
no par value; 11,618,224 shares outstanding 42,101,038 42,068,639
as of June 30, 2003 and December 31, 2002.
Accumulated deficit (39,183,968) (40,211,211)
----------- -----------
Total shareholders' equity 2,917,070 1,857,428
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$ 22,618,585 $ 21,443,787
=========== ============
The accompanying notes are an integral part of the consolidated financial
statements.
US 1 INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED)
Three Months Ended Six Months Ended
2003 2002 2003 2002
OPERATING REVENUES $31,709,396 $26,643,655 $60,261,923 $47,579,329
----------- ---------- ---------- ----------
OPERATING EXPENSES:
Purchased transportation 23,431,917 19,773,343 44,662,322 35,427,755
Commissions 3,159,742 2,645,637 5,970,348 4,661,107
Insurance and claims 1,343,611 1,043,454 2,459,574 1,819,081
Salaries, wages, and other 1,662,861 1,220,422 3,196,035 2,243,759
Other operating expenses 1,485,001 1,316,541 2,820,021 2,310,139
----------- ---------- ---------- ----------
Total operating expenses 31,083,132 25,999,397 59,108,300 46,461,841
----------- ---------- ---------- ----------
OPERATING INCOME 626,264 644,258 1,153,623 1,117,488
----------- ---------- ---------- ----------
NON-OPERATION INCOME (EXPENSE)
Legal Settlement 0 0 0 (350,964)
Interest income 3,688 6,576 7,359 16,526
Interest (expense) (138,267) (140,387) (267,984) (275,854)
Other income 79,849 78,671 195,935 104,454
----------- ---------- ---------- ----------
Total non-operating
(expense) (54,730) (55,140) (64,690) (505,838)
----------- ---------- ---------- ----------
NET INCOME BEFORE MINORITY
INTEREST $ 571,534 $ 589,118 $1,088,933 $ 611,650
Minority Interest Expense (31,374) (30,485) (61,690) (44,838)
----------- ---------- ---------- ----------
NET INCOME $ 540,160 $ 558,633 $1,027,243 $ 566,812
DIVIDENDS ON PREFERRED SHARES 0 (28,286) 0 (56,571)
Redemption of redeemable
preferred stock 0 0 0 0
----------- ---------- ---------- ----------
NET INCOME AVAILABLE
TO COMMON SHAREHOLDERS 540,160 530,347 1,027,243 510,241
=========== ========== ========== ==========
Basic and Diluted Net income
Per Common Share $ 0.05 $ 0.05 $ 0.09 $ 0.05
=========== ========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING BASIC AND DILUTED 11,618,224 10,618,224 11,618,224 10,618,224
=========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
US 1 INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2003
Total
Common Common Accumulated Shareholders'
Shares Stock Deficit Equity
Balance, December 31, 2002 11,618,224 $42,068,639 $(40,211,211) $1,857,428
Minority interest in
subsidiary 0 32,399 0 32,399
Net income for the six
months ended June 30, 2003 1,027,243 1,027,243
----------- ---------- ---------- ----------
Balance, June 30, 2003 11,618,224 $42,101,038 $(39,183,968) $2,917,070
The accompanying notes are in integral part of the consolidated financial
statements.
US 1 INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
JUNE 30, 2003 (UNAUDITED) AND JUNE 30, 2002 (UNAUDITED)
Six Months Ended June 30,
2003 2002
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income 1,027,243 566,812
Adjustments to reconcile net income to net
cash provided by(used in) operating activities
Depreciation and amortization 153,491 132,445
Gain on disposal of assets (3,733) 0
Compensation Expense resulting from
issuance of equity in subsidiary 75,000 75,000
Provision for bad debts 346,281 306,149
Minority interest expense 61,690 44,836
Legal Settlement 0 360,000
Changes in operating assets and liabilities:
Accounts receivable - trade (1,598,401) (5,743,398)
Other receivables 87,248 (263,903)
Prepaid expenses (40,461) 254,233
Deposits & other assets (6,418) (24,098)
Accounts payable 527,646 3,874,070
Accrued expenses (42,658) 125,131
Accrued interest 76,809 18,843
Insurance and claims (289,642) 226,189
Accrued compensation (56,485) 17,860
Fuel and other taxes payable 5,187 16,260
--------- --------
Net cash provided by(used in)operating activities 322,797 (13,571)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to fixed assets (117,805) (171,029)
Proceeds from sales of fixed assets 5,000 0
-------- --------
Net cash used in investing activities (112,805) (171,029)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit 463,171 234,001
Principal payments on long-term debt (255,610) (222,344)
Repayments of shareholder loans (300,000) (149,117)
Distributions to minority interest (117,553) 0
--------- --------
Net cash used in financing activities (209,992) (137,460)
--------- --------
NET DECREASE IN CASH 0 (322,060)
CASH, BEGINNING OF PERIOD 0 322,060
--------- --------
CASH, END OF PERIOD 0 0
========= ========
The accompanying notes are an integral part of the consolidated financial
statements.
US 1 INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
1. BASIS OF PRESENTATION
The accompanying consolidated balance sheet as of June 30, 2003 and the
consolidated statements of income, shareholders' equity and cash flows for the
three and six month periods ended June 30, 2003 and 2002 are unaudited, but, in
the opinion of management, include all adjustments (consisting of normal,
recurring accruals) necessary for a fair presentation of the financial position
and the results of operations at such date and for such periods. The year-end
balance sheet data was derived from audited financial statements. These
statements should be read in conjunction with US 1 Industries, Inc. and
Subsidiaries' ("Company") audited consolidated financial statements for the year
ended December 31, 2002, and the notes thereto included in the Company's Annual
Report on Form 10-K. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted, as permitted by the requirements of the
Securities and Exchange Commission, although the Company believes that the
disclosures included in these financial statements are adequate to make the
information not misleading. The results of operations for the three and six
months ended June 30, 2003 and 2002 are not necessarily indicative of the
results for a full year.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46 ("FIN46"),
Consolidation of Variable Interest Entities, an interpretation of ARB 51.
The primary objectives of FIN 46 are to provide guidance on the identification
of entities for which control is achieved through means other than through
voting rights ("variable interest entities" or "VIEs") and how to determine
when and which business enterprise should consolidate the VIE (the "primary
beneficiary"). This new model for consolidation applies to an entity in
which either (1) the equity investors (if any) do not have a controlling
financial interest or (2) the equity investment at risk is insufficient to
finance that entity's activities without receiving additional subordinated
financial support from other parties. In addition, FIN 46 requires that
both the primary beneficiary and all other enterprises with a significant
variable interest in a VIE make additional disclosures. The provisions of
FIN 46 were effective immediately for VIEs created after January 31, 2003.
The provisions are effective for the first period beginning after June 15,
2003 for VIEs held prior to February 1, 2003. The Company has not acquired
an interest in any VIEs subsequent to January 31, 2003. The Company is
currently evaluating American Inter-Fidelity Exchange ("AIFE"), a reciprocal
insurance company, to determine if this entity qualifies as a VIE. AIFE
provides auto liability insurance to several subsidiaries of the Company as
well as other entities related to the Company by common ownership. AIFE
currently receives a majority of its premiums from the Company. The Company
currently has an investment (initial premium deposit) in AIFE of $126,000,
which is accounted for under the cost method. In addition, the Company's
subsidiaries may be assessed to cover operating losses of AIFE. If it is
determined that AIFE qualifies as a VIE and the Company is the primary
beneficiary, beginning in the third quarter of 2003, the accounts of AIFE
will be included in the consolidated financial statements of the Company
with a corresponding minority interest applicable to the other subscribers.
At December 31, 2002, AIFE had a net worth of approximately $4.3 million, a
portion of which is attributable to other subscribers of AIFE.
In April 2003, the Financial Accounting Standards Board (FASB) issued SFAS
No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities," which amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under Statement 133. In particular, this Statement clarifies
under what circumstances a contract with an initial net investment meets the
characteristic of a derivative and clarifies when a derivative contains a
financing component that warrants special reporting in the statement of cash
flows. This Statement is generally effective for contracts entered into or
modified after June 30, 2003 and is to be applied prospectively. We do not
expect the adoption of SFAS No. 149 to have a material impact on our
consolidated financial statements.
US 1 INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
requires that certain financial instruments, which under previous guidance were
accounted for as equity, must now be accounted for as liabilities. The
financial instruments affected include mandatory redeemable stock, certain
financial instruments that require or may require the issuer to buy back some of
its shares in exchange for cash or other assets and certain obligations that can
be settled with shares of stock. SFAS No. 150 is effective for all financial
instruments entered into or modified after May 31, 2003, the otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. We do not expect the adoption of this standard to have a material impact
on our consolidated financial statements.
3. RECLASSIFICATIONS
Certain reclassifications have been made to the previously reported 2002
financial statements to conform with the 2003 presentation.
4. EARNINGS PER COMMON SHARE
The Company calculates earnings per share ("EPS") in accordance with
Statement of Financial Accounting Standards No. 128. Following is the
reconciliation of the numerators and denominators of the basic and diluted EPS.
There were no outstanding common stock equivalents in these periods.
Three Months Ended Six Months Ended
Numerator 2003 2002 2003 2002
Net income $ 540,160 $ 558,633 $1,027,243 $ 566,812
Dividends on preferred shares 0 (28,285) 0 (56,571)
--------- --------- ---------- ----------
Net income available to common
shareholders for basic and
diluted EPS 540,160 530,347 1,027,239 510,241
Denominator
Weighted average common shares
outstanding for basic and
diluted EPS 11,618,224 10,618,224 11,618,224 10,618,224
5. REVOLVING LINE OF CREDIT
The Company has an $8.5 million line of credit that matures on October 1,
2003. Advances under this revolving line of credit are limited to 75% of
eligible accounts receivable. The interest rate is based upon certain financial
covenants and may range from prime to prime plus .5%. At June 30, 2003, the
interest rate on this line of credit was at prime (4.00%). The Company's
accounts receivable, property, and other assets collateralize advances under the
agreement. Borrowings up to $1 million are guaranteed by the Chief Executive
Officer and Chief Financial Officer of the Company. At June 30, 2003, the
outstanding borrowings on this line of credit were $6.6 million.
This line of credit is subject to termination upon various events of
default, including failure to remit timely payments of interest, fees and
principal, any adverse change in the business of the Company or failure to meet
certain financial covenants. Financial covenants include: minimum net worth
requirements, total debt service coverage ratio, capital expenditure
limitations, and prohibition of additional indebtedness without prior
authorization.
US 1 INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. MINORITY INTEREST
Carolina Group ("Carolina") consists of Carolina National Transportation,
Inc., Gulf Line Transport, Inc., Five Star Transport, Inc., and Friendly
Transport, Inc., all majority owned subsidiaries of the Company. The Company
entered into an agreement with certain key employees of Carolina in which these
employees will earn up to a 40% ownership interest in Carolina over a three year
period, beginning in the year following the year in which Carolina achieves
positive retained earnings, contingent upon certain restrictions, including
continued employment at Carolina. In 2001, Carolina achieved positive retained
earnings. As a result, the Company will incur total compensation expense of
$400,000 over the three-year vesting period. These employees received 15%
ownership in Carolina at December 31, 2002. The employees will receive an
additional 15% at December 31, 2003, and an additional 10% at December 31, 2004.
As a result of this agreement, the Company incurred compensation expense of
$37,500 and $75,000 for the three months and six months ended June 30, 2003 and
2002. The Company also recognized minority interest expense (relating to the
employees' portion of Carolina's net income) of $31,374 and $30,485 for the
three months ended June 30, 2003 and 2002, respectively, and $61,690 and $44,838
for the six months ended June 30, 2003 and 2002, respectively.
7. LEGAL PROCEEDINGS
CAM Regional Transport and Laurel Mountain Leasing, Inc. filed a complaint
against the Company in 1994 which alleges breach of contract, claiming that
Trailblazer Transportation, Inc., a subsidiary of the Company which filed
bankruptcy, failed to abide by a purchase agreement entered into with Cam
Regional Transport, Inc. and Laurel Mountain Leasing, Inc. In addition, two
individuals affiliated with these companies claimed breach of employment
contracts against the Company.
In May 2002, judgment was rendered on these claims in favor of the plaintiff
in the amount of $700,000. As a result, the Company increased its accrual for
this litigation to $700,000 by recording a charge of $560,000 relating to this
litigation for the year ended December 31, 2002. $360,000 of this charge was
recorded for the three months ended March 31, 2002, based on the facts available
at that time. An additional $200,000 charge was recorded in the fourth quarter
of 2002. The Company is currently appealing this judgment.
The Company is involved in other litigation in the normal course of its
business. Management intends to vigorously defend these cases. In the opinion
of management, the litigation now pending will not have a material adverse
effect on the consolidated financial position of the Company.
8. STOCK COMPENSATION
In March 2003, the Company granted a total of 400,000 shares of common
stock to the company's Chief Executive Officer and Chief Financial Officer,
subject to the continued employment of these employees through December 2004.
As a result, the Company will incur approximately $220,000 of compensation
expense (based on the quoted market price of the Company's stock on the date
of grant) over the vesting period of this grant. These shares of common stock
vest on December 31, 2004. The Company has recognized $31,500 of compensation
expense related to these stock grants for the three month and six month
periods ended June 30, 2003.
9. Stock Repurchase Program
In March 2003, the Board of Directors of the Company authorized the
Company to repurchase shares of its common stock at the discretion of the
Company but subject to (a) a limit on repurchases equal to 5% of the
Company's earnings subsequent to December 31, 2001 and (b) a maximum price
per share of five times the earnings per share for the Company's most
recently completed fiscal quarter.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
Results of Operations
You should read the following discussion regarding the Company along with
the Company's consolidated financial statements and related notes included in
this quarterly report. The following discussion contains forward-looking
statements that are subject to risks, uncertainties and assumptions. The
Company's actual results, performance and achievements in 2003 and beyond may
differ materially from those expressed in, or implied by these forward-looking
statements.
The financial statements and related notes contained elsewhere in this Form
10-Q as of and for the three months and six months ended June 30, 2003 and 2002
and in the Company's Form 10-K for its fiscal year ended December 31, 2002, are
essential to an understanding of the comparisons and are incorporated by
reference into the discussion that follows.
Six months ended June 30, 2003 Compared to the six months ended June 30, 2002
The following table sets forth the percentage relationships of expense items to
revenue for the six months ended June 30, 2003 and June 30, 2002:
2003 2002
------ ------
Revenue 100.0% 100.0%
Operating expenses:
Purchased transportation 74.1 74.4
Commissions 9.9 9.8
Insurance and claims 4.1 3.8
Salaries, wages and other 5.3 4.7
Other operating expenses 4.7 4.9
------- ------
Total operating expenses 98.1 97.6
------ ------
Operating income 1.9 2.4
The Company's operating revenues increased to $60.3 million for the six
months ended June 30, 2003 from $47.6 million for the same period in 2002. This
is an increase of 26.7%. This increase is attributable to the continued growth
of Patriot Logistics, Inc. (f/k/a Keystone Intermodal, Inc.) and Keystone Lines,
Inc. and the opening of Harbor Bridge Transportation. The growth of these
subsidiaries is primarily attributable to the addition of new terminals.
Purchased transportation represents the amount an independent contractor is
paid to haul freight and is primarily based on a contractually agreed-upon
percentage of revenue generated by the haul for truck capacity provided by
independent contractors. Purchased transportation is the largest component of
operating expenses. Purchased transportation and commission expense increase or
decrease in proportion to the revenue generated through independent contractors.
Purchased transportation decreased slightly to 74.1% of revenue for the six
months ended June 30, 2003 from 74.4% for the six months ended June 30, 2002.
The slight decrease was partially offset by the slight increase in commissions.
Many agents negotiate a combined percentage payable for purchased
transportation and commission. The mix between the amounts of purchased
transportation paid versus commissions paid may vary slightly based on agent
negotiations with independent owner operators. However, in total, commissions
and purchased transportation would typically be expected to remain relatively
consistent as a percentage of revenues.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION (continued)
Commissions to agents and brokers are primarily based on contractually
agreed-upon percentages of revenue. Commissions increased slightly to 9.9% of
revenue for the six months ended June 30, 2003 from 9.8% of revenue for the six
months ended June 30, 2002. As previously described, the slight increase of
0.1% of revenue was partially offset by the decrease in purchased
transportation.
Insurance and claims increased to 4.1% of revenue for the six months ended
June 30, 2003 from 3.8% of revenue for the six months ended June 30, 2002. A
majority of the insurance and claims expense is based on a percentage of revenue
and, as a result, will increase or decrease on a consolidated basis with the
Company's revenue. Potential liability associated with accidents in the
trucking industry is severe and occurrences are unpredictable. A material
increase in the frequency or severity of accidents or the unfavorable
development of existing claims could adversely affect the Company's operating
income. The increase of 0.3% of revenue can be attributed to the increase of
certain operations' liability and cargo insurance rates due to adverse loss
experience and the continued increase of insurance rates in today's economy.
Salaries, wages, and fringe benefits were 5.3% of revenue for the six months
ended June 30, 2003 compared to 4.7% of revenue for the six months ended June
30, 2002. This increase of 0.6% can primarily be attributed to an increase in
officer compensation during 2003 and the Company's hiring of three agent
recruiters during the first quarter 2003. Also contributing to the increase is
three newer divisions that utilize employees who are paid a salary instead of
agents who would be paid commissions.
Other operating expenses as a percentage of revenue decreased slightly to
4.7% of revenue for the six months ended June 30, 2003 from 4.9% for the six
months ended June 30, 2002. While not all operating expenses are directly
variable with revenues, the increased revenue directly impacts several
components of operating expenses such as bad debt expense. In addition, the
Company has expanded by adding new terminals and operations resulting in the
addition of new locations, which in turn leads to an increase in operating
expenses such as rent. Other operating expenses increased $0.5 million from $2.3
million in 2002 to $2.8 million in 2003. The increase is primarily attributable
to (1) a $0.40 million increase due to new operations which began in the second
quarter of 2002 and (2) an overall increase in operating expenses at other
locations as volume continued to grow during 2003.
Based on the changes in revenue and expenses described above, operating
income increased by $36,135. Operating income for the six months ended June 30,
2003 was $1,153,623 compared to $1,117,488 for the six months ended June 30,
2002. Although operating income increased in dollar amount for the six months
ended June 30, 2003 compared to the six months ended June 30, 2002, operating
income as a percentage of revenue decreased by 0.5%. This decrease can be
attributed to three of the Company's operations that did not perform according
to the Company's expectations. Management has taken corrective action.
Interest expense decreased by $7,870 in 2003. Interest expense for the six
months ended June 30, 2003 was $267,984 compared to interest expense of $275,854
for the six months ended June 30, 2002. This decrease in interest expense is
attributable to a continued decrease in the prime rate. The rate on the
Company's loan with Firstar is currently based on certain financial covenants
and may range from prime to prime plus .5%. At June 30, 2003, the interest rate
charged on the loan with Firstar was prime (4.00%).
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION (continued)
Non-operating (income) expense, exclusive of interest expense, includes
income from rental property, storage, equipment usage, fees, discounts and legal
settlement costs. Non-operating (income) expense, exclusive of interest
expense, was ($203,294) for the six months ended June 30, 2003 versus $229,984
for the six months ended June 30, 2002. This is an increase of ($433,278) and is
primarily attributable to a decrease in legal settlement expense. For the six
months ended June 30, 2002, the Company incurred a $350,964 expense relating to
a court ruling on litigation against the Company.
Minority interest expense of $61,690 and $44,838 for the six months ended
June 30, 2003 and 2002, respectively, is the result of an agreement with certain
key employees of Carolina National, a wholly owned subsidiary of the Company.
Under the terms of this agreement, these employees will earn up to a 40%
ownership interest in Carolina over a three-year period (see note 6 to condensed
financial statements).
As a result of the factors described above, net income for the six months
ended June 30, 2003 was $1,027,243 compared with $510,241 for the same period in
2002.
Three months ended June 30, 2003 Compared to the three months ended June 30,
2002
The following table sets forth the percentage relationships of expense items to
revenue for the three months ended June 30, 2003 and June 30, 2002:
2003 2002
------ ------
Revenue 100.0% 100.0%
Operating expenses:
Purchased transportation 73.9 74.2
Commissions 10.0 9.9
Insurance and claims 4.2 3.9
Salaries, wages and other 5.2 4.6
Other operating expenses 4.7 4.9
------- ------
Total operating expenses 98.01 97.5
------- ------
Operating income 2.0 2.5
The Company's operating revenues increased to $31.7 million for the three
months ended June 30, 2003 from $26.6 million for the same period in 2002. This
is an increase of 19.0%. This increase is attributable to the continued growth
of Patriot Logistics, Inc. (f/k/a Keystone Intermodal, Inc.) and Keystone Lines,
Inc. and the opening of Harbor Bridge Transportation.
Purchased transportation represents the amount an independent contractor is
paid to haul freight and is primarily based on a contractually agreed-upon
percentage of revenue generated by the haul for truck capacity provided by
independent contractors. Purchased transportation is the largest component of
operating expenses. Purchased transportation and commission expense increase or
decrease in proportion to the revenue generated through independent contractors.
Purchased transportation decreased slightly to 73.9% of revenue for the three
months ended June 30, 2003 from 74.2% for the three months ended June 30, 2002.
The slight decrease is partially offset by the slight increase in commissions.
Many agents negotiate a combined percentage payable for purchased transportation
and commission. The mix between the amounts of purchased transportation paid
versus commissions paid may vary slightly based on agent negotiations with
independent owner operators. However, in total, commissions and purchased
transportation would typically be expected to remain relatively consistent as a
percentage of revenues.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION (continued)
Commissions to agents and brokers are primarily based on contractually
agreed-upon percentages of revenue. Commissions remained relatively consistent
at 10.0% of revenue for the three months ended June 30, 2003 from 9.9% of
revenue for the three months ended June 30, 2002. As previously described, the
slight increase of 0.1% of revenue, partially offsets the decrease in purchased
transportation.
Insurance and claims increased to 4.2% of revenue for the three months ended
June 30, 2003 from 3.9% of revenue for the three months ended June 30, 2002. A
majority of the insurance and claims expense is based on a percentage of revenue
and, as a result, will increase or decrease on a consolidated basis with the
Company's revenue. Potential liability associated with accidents in the
trucking industry is severe and occurrences are unpredictable. A material
increase in the frequency or severity of accidents or the unfavorable
development of existing claims could adversely affect the Company's operating
income. The increase of 0.2% of revenue can be attributed to the increase of
certain operations' liability and cargo insurance rates due to adverse loss
experience and the continued increase of insurance rates in today's economy.
Salaries, wages, and fringe benefits were 5.2% of revenue for the three
months ended June 30, 2003 compared to 4.6% of revenue for the three months
ended June 30, 2002. This increase of 0.6% can primarily be attributed to an
increase in officer compensation during 2003 and the Company's hiring of three
agent recruiters during the first quarter 2003.
Other operating expenses as a percentage of revenue decreased slightly to
4.7% of revenue for the three months ended June 30, 2003 from 4.9% for the three
months ended June 30, 2002. While not all operating expenses are directly
variable with revenues, several components of operating expenses such as bad
debt expense are directly impacted by the increased revenue. In addition, the
Company has expanded by adding new terminals and operations resulting in the
addition of new locations which in turn leads to an increase in operating
expenses such as rent. Other operating expenses increased $0.2 million from $1.3
million in 2002 to $1.5 million in 2003. The increase is primarily attributable
to new operations which began in the second quarter of 2002 and an overall
increase in operating expenses at other locations as volume continued to grow
during 2003.
Based on the changes in revenue and expenses described above, operating
income decreased by $17,994. Operating income for the three months ended June
30, 2003 was $626,264 compared to $644,258 for the three months ended June 30,
2002. This decrease can be attributed to three of the Company's operations that
did not perform according to the Company's expectations. Management has taken
corrective action.
Interest expense decreased by $2,120 in 2003. Interest expense for the
three months ended June 30, 2003 was $138,267 compared to interest expense of
$140,387 for the three months ended June 30, 2002. This decrease in interest
expense is attributable to a continued decrease in the prime rate. The rate on
the Company's loan with Firstar is currently based on certain financial
covenants and may range from prime to prime plus .5%. At June 30, 2003, the
interest rate charged on the loan with Firstar was prime (4.00%).
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION (continued)
Non-operating (income) expense, exclusive of interest expense, remained
relatively constant. For the three months ended June 30, 2003, Non-operating
(income) expense was ($83,537) versus $(85,247) for the three months ended June
30, 2002.
Minority interest expense of $31,374 and $30,485 for the three months ended
June 30, 2003 and 2002, respectively, is the result of an agreement with certain
key employees of Carolina National, a wholly owned subsidiary of the Company.
Under the terms of this agreement, these employees will earn up to a 40%
ownership interest in Carolina over a three-year period (see note 6 to condensed
financial statements).
As a result of the factors described above, net income for the three months
ended June 30, 2003 was $540,160 compared with $530,347 for the same period in
2002.
Liquidity and Capital Resources
Net cash provided by (used in) operating activities increased $336,368 from
($13,571) for the six months ended June 30, 2002 to $322,797 for the six months
ended June 30, 2003. Net income increased to $1,027,243 for the six months
ended June 30, 2003 from $566,812 for the six months ended June 30, 2002.
Although the Company continues to operate profitably, a significant amount of
the profits are utilized to fund the Company's continued growth. As a result of
the continued growth of existing terminals and new operations in the second half
of 2002, accounts receivable increased $1,598,401 in 2003. This increase in
accounts receivable was only partially offset by a corresponding increase in
accounts payable of $527,646. This is due to the fact that the Company's
customers typically pay 30 - 45 days from the invoice date. However, payment
terms to many agents and independent owner operators are typically less than 15
days. The Company also has $700,000 accrued relating to a court ruling against
the Company on certain litigation. While the Company intends to appeal this
verdict, if the appeal is unsuccessful, the funding of this amount will result
in a reduction in future cash provided by operations.
Net cash used in investing activities was $112,805 for the six months ended
June 30, 2003 compared to net cash used in investing activities of $171,029 for
the six months ended June 30, 2002. Net cash used in investing activities for
both periods related primarily to the purchase of equipment such as trailers.
Net cash used in financing activities increased $72,532 from $137,460 for
the six months ended June 30, 2002 to $209,992 for the six months ended June 30,
2003. The cash used in financing activities for 2003 is primarily due to
repayments of shareholder and equipment loans in the amount of $555,610. This
is offset by additional borrowing on the Company's line of credit in 2003 of
$463,171. During 2003, the Company's subsidiary Carolina National also
distributed $117,553 to minority shareholders.
The Company has an $8.5 million revolving line of credit with borrowings
limited to 75% of eligible accounts receivable. Based on the Company's eligible
accounts receivable at June 30, 2003, unused availability under the line of
credit at June 30, 2003 was $1,918,349. The Company is dependent upon the funds
available under its loan agreement for liquidity. As long as the Company can
fund 25% of its accounts receivable from funds generated internally from
operations or otherwise, this facility provides the Company sufficient liquidity
to meet its needs on an ongoing basis. However, as the Company continues to
grow, it will need to expand the facility in order to fund its growth. This
facility expires on October 1, 2003 and the Company and the lender have begun
discussion regarding its extension, but there can be no assurance regarding
their outcome.
The Company also has two additional equipment loans used to fund equipment
purchases. The outstanding balances on these loans bear interest at the prime
rate in effect plus 1% per annum (5.00% at June 30, 2003). The principal
balance of these equipment loans is payable based on a five-year amortization of
the outstanding balances with any remaining unpaid balance due in October 2003.
The outstanding balances under these equipment loans totaled $560,998 at June
30, 2003. The loans are collateralized by the related equipment funded by these
borrowings. The Company intends to and believes it will be successful in
extending the maturity date of these loans into fiscal 2004.
Liquidity and Capital Resources (continued)
The line of credit and equipment loans are subject to termination upon
various events of default, including failure to remit timely payments of
interest, fees and principal, any adverse change in the business of the Company
or failure to meet certain financial covenants. Financial covenants include:
minimum net worth requirements, total debt service coverage ratio,
capital expenditure limitations, and prohibition of additional indebtedness
without prior authorization.
The Company also has approximately $3.0 million of debt payable to the Chief
Executive Officer and Chief Financial Officer or entities under their control.
This debt is subordinate to the lender on the revolving credit facility and is
currently being repaid at a rate of $120,000 per year. Currently, this
shareholder debt matures in October 2, 2004. It is anticipated that the maturity
date of this debt will eventually be extended beyond 2004 or the debt may be
converted into equity.
Critical Accounting Policies and Estimates
Our financial statements reflect the selection and application of accounting
policies, which require management to make significant estimates and
assumptions. We believe that the following are some of the more critical
judgment areas in the application of our accounting policies that currently
affect our financial condition and results of operations.
Preparation of the consolidated financial statements in accordance with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions affecting the reported amounts of
assets, liabilities, revenues, and expenses and related contingent liabilities.
On an on-going basis, the Company evaluates its estimates, including those
related to revenues, bad debts, 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.
Actual results may differ from these estimates under different assumptions or
conditions.
We record an allowance for doubtful accounts based on (1) specifically
identified amounts that we believe to be uncollectible and (2) an additional
allowance based on certain percentages of our aged receivables, which are
determined uncollectible based on historical experience and our assessment of
the general financial conditions affecting our customer base. If actual
collections experience changes, revisions to our allowance may be required.
After all attempts to collect a receivable have failed, the receivable is
written off against the allowance. In addition, we review the components of
other receivables, consisting primarily of advances to drivers and agents, and
write off specifically identified amounts that we believe to be uncollectible.
Revenue for freight is recognized upon delivery. Amounts payable for purchased
transportation, commissions and insurance expense are accrued when the related
revenue is recognized.
We are involved in various litigation in the normal course of business.
Management evaluates the likelihood of a potential loss from various litigation
on a quarterly basis. When it is probable that a loss will occur from litigation
and the amount of the loss can be reasonably estimated, the loss is recognized
in the Company's financial statements. If a potential loss is not both
reasonably possible and cannot be reasonably estimated, but there is at least a
reasonable possibility that a loss may be incurred, the litigation is not
recorded in the Company's financial statements but this litigation is disclosed
in the footnotes of the financial statements.
The Company carries insurance for public liability and property damage, and
cargo loss and damage through various programs. A significant portion of the
Company's liability insurance is obtained from American Inter-Fidelity Exchange,
a related party. The Company's insurance liabilities are based upon the best
information currently available and are subject to revision in future periods as
additional information becomes available. Management believes it has adequately
provided for insurance claims.
Critical Accounting Policies and Estimates (continued)
Deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
basis of existing assets and liabilities. At June 30, 2003, the Company's
deferred tax asset consists principally of net operating loss carry forwards.
The Company's deferred tax asset has been reduced by a valuation allowance to
the extent such benefits are not expected to be fully utilized. The Company has
based its estimate of the future utilization of the net operating loss upon its
estimate of future taxable income. If actual future taxable income differs,
revisions to the valuation allowance and net deferred tax asset may be required.
Quantitative and Qualitative Disclosures About Market Risk
Inflation
Changes in freight rates charged by the Company to its customers are
generally reflected in the cost of purchased transportation and commissions paid
by the Company to independent contractors and agents, respectively. Therefore,
management believes that future-operating results of the Company will be
affected primarily by changes in volume of business. However, due to the highly
competitive nature of the truckload motor carrier industry, it is possible that
future freight rates and cost of purchased transportation may fluctuate,
affecting the Company's profitability.
Certain Relationships and Related Transactions.
The Company leases office space for its headquarters in Gary, Indiana, for
$3,000 monthly, from Michael E. Kibler, the president and Chief Executive
Officer and a director of the Company, and Harold E. Antonson, the Chief
Financial Officer, treasurer and a director of the Company. Messrs. Kibler and
Antonson own the property as joint tenants.
One of the Company's subsidiaries provides safety, management, and
accounting services to companies controlled by the President and Chief
Certain Relationships and Related Transactions (Continued)
Financial Officer of the Company. These services are priced to cover the cost
of the employees providing the services and the overhead.
The Company has approximately $32,000 of other accounts receivable due from
entities that could be deemed to be under common control as of June 30, 2003.
One of the Company's insurance providers, American Inter-Fidelity Exchange
(AIFE), is managed by a Director of the Company and the Company has a deposit
with the provider. In addition, the Chief Executive Officer and Chief Financial
Officer of the Company are shareholders of American Inter-Fidelity Corporation
("AIFC"), which manages AIFE. AIFC is entitled to receive a management fee from
AIFE. AIFE has paid no fees to AIFC in 2003 or 2002.
The Company has long-term notes payable due to its Chief Executive Officer,
Chief Financial Officer, and August Investment Partnership, an entity affiliated
through common ownership, totaling approximately $3.0 million. In addition, the
Company has approximately $1 million of accrued interest due under these notes
payable.
The Company conducts business with freight companies under the control of a
director of the Company. Accounts receivable at June 30, 2003 includes $560,971
due from or guaranteed by these companies.
PART II. OTHER INFORMATION
Item 5. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Based on their
evaluations as
(b) of a date within 90 days of the filing of this report, our principal
executive officer and principal financial officer, with the participation of our
full management team, have concluded that our disclosure controls and procedures
(as defined in Rules 13(a)-14(c) and 15(d)-14(c) under the Securities Exchange
Act)
(c) are effective to ensure that information required to be disclosed by us in
reports that we file or submit under the Securities Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms
(d) of the SEC.
(e) Changes in controls. There were no significant changes in our internal
controls
(f) or in other factors that could significantly affect these internal controls
subsequent to the date of their most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
(g) Disclosure controls and procedures. Disclosure controls and procedures are
our controls and other procedures that are designed to ensure that information
(h) required to be disclosed by us in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported, within the
time
(i) periods specified in the Securities and Exchange Commission's rules and
forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by
us in
(j) the reports that we file under the Exchange Act is accumulated and
communicated
(k) to our management, including our principal executive officer and principal
(l) financial officer, as appropriate to allow timely decisions regarding
required disclosure.
Item 6 Exhibits and Reports on Form 8-K
(a) (1) List of Exhibits
The following exhibits, numbered in accordance with Item 601 of
Regulation S-K, are filed as part of this report:
Exhibit 31.1 Certification 302 of Chief Executive Officer
Exhibit 31.2 Certification 302 of Chief Financial Officer
Exhibit 32.1 Certification 906 of Chief Executive Officer
Exhibit 32.2 Certification 906 of Chief Financial Officer
(b)(1) Reports on Form 8-K
No Reports on Form 8-K have been filed during the quarter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned there unto duly authorized.
US 1 Industries, Inc.
Michael E. Kibler
President
Harold E. Antonson
Chief Financial Officer
August 13, 2003