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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, 2004.
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 14, 2004, there were 11,618,224 shares of registrant's common stock
outstanding.
US 1 INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003
Part I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
ASSETS
June 30, December 31,
2004 2003
(Unaudited)
CURRENT ASSETS:
Cash $ 0 $ 0
Accounts receivable-trade, less allowances for
doubtful accounts of $875,000 and $882,000
respectively 20,228,857 17,910,027
Other receivables, including receivables due
from affiliated entities of $61,000 and
$51,000, respectively 1,414,504 1,254,243
Prepaid expenses and other current assets 470,775 289,776
Current deferred tax asset 600,000 600,000
----------- ----------
Total current assets 22,714,136 20,054,046
FIXED ASSETS:
Equipment 1,846,711 1,765,979
Less accumulated depreciation and amortization (949,365) (794,676)
----------- ----------
Net fixed assets 897,346 971,303
----------- -----------
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 420,364 397,745
----------- -----------
TOTAL ASSETS $24,685,846 $22,077,094
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
US 1 INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, December 31,
2004 2003
(Unaudited)
CURRENT LIABILITIES:
Revolving line of credit $ 5,438,453 $ 4,884,758
Current portion of long-term debt 344,864 194,911
Accounts payable 7,849,870 7,009,625
Accrued expenses 352,583 377,475
Insurance and claims 1,179,075 788,954
Accrued compensation 223,721 47,863
Accrued interest 1,198,577 1,134,787
Fuel and other taxes payable 221,817 28,138
Accrued legal settlement 700,000 700,000
----------- ------------
Total current liabilities 17,508,960 15,166,511
----------- ------------
LONG-TERM DEBT (primarily to related parties) 3,084,640 3,176,156
MINORITY INTEREST 266,055 324,927
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, authorized 20,000,000 shares;
no par value; 11,618,224 shares outstanding 42,312,594 42,227,725
as of June 30, 2004 and December 31, 2003.
Accumulated deficit (38,486,403) (38,818,225)
----------- -----------
Total shareholders' equity 3,826,191 3,409,500
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 24,685,846 $ 22,077,094
=========== ============
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, 2004 AND 2003 (UNAUDITED)
Three Months Ended Six Months Ended
2004 2003 2004 2003
OPERATING REVENUES $35,974,840 $31,709,396 $66,704,893 $60,261,923
----------- ---------- ----------- -----------
OPERATING EXPENSES:
Purchased transportation 26,546,376 23,431,917 49,168,097 44,662,322
Commissions 3,790,592 3,159,742 6,910,669 5,970,348
Insurance and claims 1,627,351 1,343,611 2,944,314 2,459,574
Salaries, wages, and other 2,074,753 1,662,861 4,001,640 3,196,035
Other operating expenses 1,760,115 1,485,001 3,204,576 2,820,021
----------- ---------- ---------- ----------
Total operating expenses 35,799,187 31,083,132 66,229,296 59,108,300
----------- ---------- ---------- ----------
OPERATING INCOME 175,653 626,264 475,597 1,153,623
----------- ---------- ---------- ----------
NON-OPERATION INCOME (EXPENSE)
Interest income 0 3,688 4,469 7,359
Interest (expense) (100,332) (138,267 (197,025) (267,984)
Other income 62,178 79,849 116,451 195,935
----------- ---------- ---------- ----------
Total non-operating
(expense) (38,154) (54,730) (76,105) (64,690)
----------- ---------- ---------- ----------
NET INCOME BEFORE
MINORITY INTEREST $ 137,499 $ 571,534 $ 399,492 $ 1,088,933
Minority Interest Expense (37,616) (31,374) (67,670) (61,690)
----------- ---------- ---------- ----------
NET INCOME $ 99,883 $ 540,160 $ 331,822 $ 1,027,243
Basic Net Income $0.01 $0.05 $0.03 $0.09
Per Common Share
Diluted Net Income $0.01 $0.04 $0.03 $0.08
Per Common Share
WEIGHTED AVERAGE
SHARES OUTSTANDING - 11,618,224 11,618,224 11,618,224 11,618,224
BASIC
WEIGHTED AVERAGE
SHARES OUTSTANDING - 11,946,664 11,740,505 11,934,339 11,740,505
DILUTED
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, 2004
Total
Common Common Accumulated Shareholders'
Shares Stock Deficit________ Equity
Balance, December 31, 2003 11,618,224 $42,227,725 $(38,818,225) 3,409,500
Minority interest in subsidiary 0 22,012 0 22,012
Grant of restricted common stock 0 62,857 0 62,857
Net income for the six months ended
June 30, 2004 0 0 331,822 331,822
Balance, June 30, 2004 11,618,224 $42,312,594 $(38,486,403) $3,826,191
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, 2004 AND JUNE 30, 2003 (UNAUDITED)
Six Months Ended June 30,
2004 2003
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income 331,822 1,027,243
Adjustments to reconcile net income to net
cash (used in)provided by operating activities
Depreciation and amortization 158,111 153,491
Gain on disposal of assets (3,733)
Compensation Expense resulting from
issuance of restricted stock 62,857 31,500
Compensation Expense resulting from
issuance of equity in subsidiary 50,000 75,000
Provision for bad debts 253,000 346,281
Minority interest expense 67,670 61,690
Changes in operating assets and liabilities:
Accounts receivable - trade (2,571,830) (1,598,401)
Other receivables (160,261) 87,248
Prepaid expenses and other current assets (203,618) (46,879)
Accounts payable 836,508 527,646
Accrued expenses (24,892) (74,158)
Accrued interest 63,790 76,809
Insurance and claims 390,121 (289,642)
Accrued compensation 175,858 (56,485)
Fuel and other taxes payable 193,679 5,187
--------- --------
Net cash (used in)provided by operating activities (377,185) 322,797
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to fixed assets (116,654) (117,805)
Proceeds from sales of fixed assets 32,500 5,000
-------- ---------
Net cash used in investing activities (84,154) (112,805)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit 553,695 463,171
Principal borrowings (payments) on long-term debt 62,172 (255,610)
Repayments of shareholder loans 0 (300,000)
Distributions to minority interest (154,528) (117,553)
--------- ---------
Net cash provided by (used in) financing activities 461,339 (209,992)
--------- ---------
NET DECREASE IN CASH 0 0
CASH, BEGINNING OF PERIOD 0 0
--------- ---------
CASH, END OF PERIOD 0 0
========= =========
Cash paid for interest $133,235 $191,176
========= =========
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, 2004 AND 2003
1. BASIS OF PRESENTATION
The accompanying consolidated balance sheet as of June 30, 2004 and the
consolidated statements of income, shareholders' equity and cash flows for the
three and six month periods ended June 30, 2004 and 2003 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' ("the Company") audited consolidated financial statements for the
year ended December 31, 2003, 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, 2004 and 2003 are not necessarily
indicative of the results for a full year.
2. EARNINGS PER SHARE
The Company calculates earnings per share ("EPS") in accordance with SFAS
No. 128. Following is the reconciliation of the numerators and denominators of
basic and diluted EPS.
Three Months Ended Six Months Ended
Numerator 2004 2003 2004 2003
Net income $ 99,884 $ 540,160 $ 331,823 $1,027,243
Dividends on preferred shares 0 0 0 0
---------- ---------- ---------- ----------
Net income available to common
shareholders for basic EPS 99,884 540,160 331,823 1,027,243
Net income attributable to
unvested minority interest
shares in subsidiary (10,009) (28,124) (19,260) (68,545)
----------- ----------- ----------- ---------
Net income available to common
shareholders for diluted EPS 89,875 512,036 312,563 958,698
Denominator
Weighted average common shares
outstanding for basic EPS 11,618,224 11,618,224 11,618,224 11,618,224
Effect of diluted securities
Unvested restricted stock
granted to employees 328,440 122,281 316,115 122,281
Weighted average shares
Outstanding for
diluted EPS 11,946,664 11,740,505 11,934,339 11,740,505
3. BANK LINE OF CREDIT
The Company has a $10.0 million line of credit that matures on October 1,
2005. Advances under this revolving line of credit are limited to 75% of
eligible accounts receivable. Unused availability under this line of credit was
$4.6 million at June 30, 2004. The interest rate is based upon certain
financial covenants and may range from prime to prime less .50%. At June 30,
2004, the interest rate on this line of credit was at prime less .25% (3.75%).
The Company's accounts receivable, property, and other assets collateralize
advances under the agreement. Borrowings up to $1.0 million are guaranteed by
the Chief Executive Officer and Chief Financial Officer of the Company. At June
30, 2004 the outstanding borrowings on this line of credit were $5.4 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.
In October 2003, the Company's lender granted it a $500,000 new equipment
line of credit. Although the Company has not utilized this new equipment line of
credit, the interest rate will range from prime to prime less 0.50% per annum
based on certain financial covenants. This new equipment line of credit matures
October 1, 2005.
4. MINORITY INTEREST
The Company entered into an agreement with certain key employees of Carolina
National Transportation, ("Carolina") a subsidiary of the Company, 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 and received an
additional 15% at December 31, 2003. These employees will receive an additional
10% ownership interest at December 31, 2004. As a result of this agreement, the
Company incurred compensation expense of $50,000 and $37,500 for the six months
ended June 30, 2004 and 2003, respectively. The excess of the fair value of the
Carolina common stock issued over the value of this common stock is reflected as
a credit to common stock. The Company also recognized minority interest expense
(relating to the employees' portion of Carolina's net income) of $37,616 and
$31,374 for the three months ended June 30, 2004 and 2003, respectively, and
$67,670 and $61,690 for the six months ended June 30, 2004 and 2003,
respectively. Carolina paid dividends of $154,528 and $117,553 to the minority
shareholders in fiscal 2004 and 2003, respectively.
5. LEGAL PROCEEDINGS
The Company is involved in various 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.
6. STOCK COMPENSATION
In March 2003, the Company granted 400,000 shares (200,000 each) 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 recognized compensation expense related to these
stock grants of $31,427 and $31,500 for the three months ended June 30, 2004 and
2003, respectively, and $62,857 and $31, 500 for the six months ended June 30,
2004 and 2003, respectively.
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 2004 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, 2004 and 2003
and in the Company's Form 10-K for its fiscal year ended December 31, 2003, are
essential to an understanding of the comparisons and are incorporated by
reference into the discussion that follows.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
Six months ended June 30, 2004 Compared to the six months ended June 30, 2003
The following table sets forth the percentage relationships of expense items to
revenue for the six months ended June 30, 2004 and June 30, 2003:
2004 2003
------ ------
Revenue 100.0% 100.0%
Operating expenses:
Purchased transportation 73.7 74.1
Commissions 10.4 9.9
Insurance and claims 4.4 4.1
Salaries, wages and other 6.0 5.3
Other operating expenses 4.8 4.7
------- ------
Total operating expenses 99.3 98.1
------ ------
Operating income 0.7 1.9
The Company's operating revenues increased to $66.7 million for the six
months ended June 30, 2004 from $60.3 million for the same period in 2003. This
is an increase of 10.7%. This increase is attributable to the continued growth
of Patriot Logistics, Inc. (f/k/a Keystone Intermodal, Inc.)and Keystone
Logistics, Inc. The growth of these subsidiaries is primarily attributable to
the addition of new terminals and growth of existing terminals.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION (Continued)
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 73.7% of revenue for
the six months ended June 30, 2004 from 74.1% for the six months ended June 30,
2003. 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.
Commissions to agents and brokers are primarily based on contractually
agreed-upon percentages of revenue. Commissions increased to 10.4% of revenue
for the six months ended June 30, 2004 from 9.9% of revenue for the six months
ended June 30, 2003. As previously described, the slight increase of 0.5% of
revenue was partially offset by the decrease in purchased transportation. In
total, purchased transportation and commissions were 84.1% of revenue in 2004
compared to 84% of revenue in 2003.
Insurance and claims increased to 4.4% of revenue for the six months ended
June 30, 2004 from 4.1% of revenue for the six months ended June 30, 2003. 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 in
claims incurred by certain operations of the Company.
Salaries, wages, and fringe benefits were 6.0% of revenue for the six months
ended June 30, 2004 compared to 5.3% of revenue for the six months ended June
30, 2003. This increase of 0.7% can primarily be attributed to the additional
personnel hired to accommodate the growth of expanding terminals that have not
yet begun to produce at their full revenue potential.
Other operating expenses as a percentage of revenue increased slightly to
4.8% of revenue for the six months ended June 30, 2004 from 4.7% for the six
months ended June 30, 2003. While not all operating expenses are directly
variable with revenues, the increased revenue directly impacts several
components of operating expenses due to the Company adding new locations.
Based on the changes in revenue and expenses described above, operating
income decreased by $678,026. Operating income for the six months ended June 30,
2004 was $475,597 compared to $1,153,623 for the six months ended June 30, 2003.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION (Continued)
Interest expense decreased by $70,959 in 2004. Interest expense for the six
months ended June 30, 2004 was $197,025 compared to interest expense of $267,984
for the six months ended June 30, 2003. This decrease in interest
expense is primarily attributable to a decrease in the amount outstanding on the
Company's line of credit. The rate on the Company's loan with US Bank is
currently based on certain financial covenants and may range from prime to prime
less .5%. At June 30, 2004, the interest rate charged on the loan with US Bank
was prime less .25% (3.75%). At June 30, 2003 the interest rate charged on the
loan with US Bank was 4.0%.
Non-operating (income) expense, exclusive of interest expense, includes
income from rental property and storage fees. Non-operating (income) expense,
exclusive of interest expense, was ($120,920) for the six months ended June 30,
2004 versus ($203,294) for the six months ended June 30, 2003. This is a
decrease of $82,374 and is primarily attributable to a decrease in storage fee
income associated with one of the Company's divisions located in Laredo, Texas.
Minority interest expense of $67,670 and $61,690 for the six months ended
June 30, 2004 and 2003, 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 4 to
condensed consolidated financial statements).
As a result of the factors described above, net income for the six months
ended June 30, 2004 was $331,822 compared with $1,027,243 for the same period in
2003.
Three months ended June 30, 2004 compared to the three months ended June 31,
2003.
The following table sets forth the percentage relationships of expense items to
revenue for the three months ended June 30, 2004 and June 30, 2003:
2004 2003
------ ------
Revenue 100.0% 100.0%
Operating expenses:
Purchased transportation 73.8 73.9
Commissions 10.5 10.0
Insurance and claims 4.5 4.2
Salaries, wages and fringe benefits 5.8 5.2
Other operating expenses 4.9 4.7
------- ------
Total operating expenses 99.5 98.0
------ ------
Operating income 0.5 2.0
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION (Continued)
The Company's operating revenues increased to $36.0 million for the three
months ended June 30, 2004 from $31.7 million for the same period in 2003. This
is an increase of 13.5%. This increase is attributable to the
continued growth of Patriot Logistics, Inc. (f/k/a Keystone Intermodal, Inc.)
and Keystone Logistics, Inc. The growth of these subsidiaries is attributable to
both the addition of new terminals and growth of existing 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 73.8% of revenue for the three
months ended June 30, 2004 from 73.9% for the three months ended June 30, 2003.
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.
Commissions to agents and brokers are primarily based on contractually
agreed-upon percentages of revenue. Commissions increased to 10.5% of revenue
for the three months ended June 30, 2004 from 10.0% of revenue for the three
months ended June 30, 2003. As previously described, the slight increase in
commissions of 0.5% of revenue was partially offset by the decrease in purchased
transportation.
Insurance and claims increased to 4.5% of revenue for the three months ended
June 30, 2004 from 4.2% of revenue for the three months ended June 30, 2003. 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 in
claims incurred by certain operations of the Company.
Salaries, wages, and fringe benefits were 5.8% of revenue for the three
months ended June 30, 2004 compared to 5.2% of revenue for the three months
ended June 30, 2003. This increase of 0.6% can primarily be attributed to the
additional personnel hired to accommodate the growth of expanding terminals.
Other operating expenses as a percentage of revenue increased slightly to
4.9% for the three months ended June 30, 2004 from 4.7% for the same period in
2003. While not all operating expenses are directly variable with revenues, the
increased revenue directly impacts several components of operating expenses due
to the Company adding new locations.
Based on the changes in revenue and expenses described above, operating
income decreased by $450,611. Operating income for the three months ended June
30, 2004 was $175,653 compared to $626,264 for the three months ended June 30,
2003.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION (Continued)
Interest expense decreased by $37,935, from $100,332 for the three months
ended June 30, 2004 to $138,267 for the three months ended June 30, 2003. This
decrease in interest expense is primarily attributable to a decrease in the
amount outstanding on the Company's line of credit. The rate on the Company's
loan with US Bank is currently based on certain financial covenants and may
range from prime to prime less .5%. At June 30, 2004, the interest rate charged
on the loan with US Bank was 3.75%. At June 30, 2003 the interest rate on this
loan was 4.00%.
Non-operating (income) expense, exclusive of interest expense, includes
income from rental property and storage fees. Non-operating (income) expense,
exclusive of interest expense, was ($62,178) for the three months ended June 30,
2004 versus ($83,537) for the three months ended June 30, 2003. The decrease is
partially attributed to a decrease in storage fee income associated with one of
the Company's divisions located in Laredo, Texas.
Minority interest expense of $37,616 and $31,374 for the three months ended
June 30, 2004 and 2003, 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 4 to condensed
consolidated financial statements).
As a result of the factors described above, net income for the three months
ended June 30, 2004 was $99,883 compared with $540,160 for the same period in
2003.
Liquidity and Capital Resources
Net cash (used in) provided by operating activities decreased ($0.7 million)
from $322,797 for the six months ended June 30, 2003 to ($377,185) for the six
months ended June 30, 2004. Cash used in operating activities for the first six
months of 2004 can be attributed to an increase in accounts receivable of
$2,571,830 due to a new agent at the Cam Transport, Inc. office and increased
revenue at Keystone Logistics, Inc., and an increase of prepaid expenses of
$203,618. This is somewhat offset by increases in accounts payable due in part
to increased volume associated with the expansion of the Patriot Office,
insurance and claims payable, accrued compensation, and fuel and other taxes
payable.
Net cash used in investing activities was $84,154 for the six months ended
June 30, 2004 compared to $112,805 for the six months ended June 30, 2003. Net
cash used in investing activities decreased due to the increase in proceeds from
sales of fixed assets.
Net cash provided by (used in) financing activities increased $671,331 from
($209,992) for the six months ended June 30, 2003 to $461,339 for the six months
ended June 30, 2004. The cash provided by financing activities for 2004 is
primarily due to increased borrowings under the line of credit.
Effective October 1, 2003, the Company's Lender agreed to amend the existing
bank agreement to increase the Company's revolving line of credit from $8.5
million to $10.0 million. The maturity date of the Company's revolving line of
credit was also extended from October 1, 2003 to October 1, 2005. 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 less 0.50%. At June 30, 2004, the interest rate on
Liquidity and Capital Resources (Continued)
this line of credit was at prime less .25% (3.75%). The Company's accounts
receivable, property, and other assets collateralize advances under the
agreement. Unused availability under this line of credit was approximately
$4.6 million at June 30, 2004. The Chief Executive Officer and Chief Financial
Officer of the Company guarantee borrowings of up to $1 million. At June 30,
2004, the outstanding borrowings on this line of credit were $5.4 million.
The Company is dependent upon the funds available under its line of credit
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 has historically provided the Company sufficient liquidity to meet its
needs on an ongoing basis.
The Company also has two additional equipment loans with its primary lender
used to fund equipment purchases. The outstanding balances on these loans bear
interest at the prime rate in effect less 0.25% per annum (3.75% at June 30,
2004) based on certain financial covenants. The principal balance of these
equipment loans is payable based on a five-year amortization of the outstanding
balances. The outstanding balances under these equipment loans totaled $377,965
at June 30, 2004. These loans mature in October 2005.
In October 2003, the Company's lender granted them a new equipment line of
credit in the amount of $500,000. Although the Company has not utilized this new
equipment line of credit, the interest rate will range from prime to prime less
0.50% per annum based on certain financial covenants. This new equipment line
of credit carries a maturity date of October 1, 2005.
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. The required financial
covenants include: minimum net worth requirements, total debt service coverage
ratio, capital expenditure limitations, and prohibition of additional
indebtedness without prior authorization.
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. Rising fuel prices are
generally offset by a fuel surcharge the Company passes onto its customers.
However, due to the highly competitive nature of the truckload motor carrier
industry, it is possible that future freight rates, cost of purchased
transportation, as well as fuel prices may fluctuate, affecting the Company's
profitability.
Interest Rate Risk
The Company has a revolving line of credit with a bank, which currently
bears interest at the prime rate in affect less .50% annum (at June 30, 2004 the
rate was 3.75%). The interest rate is based on certain financial covenants and
may range from prime to prime less .5%. In addition, the company has certain
equipment lines-of-credit which bear interest at the prime rate less .25% annum
(at June 30, 2004 the rate was 3.75%). The Company also has subordinated debt
with related parties which bears interest at rates ranging from prime + .75% to
prime plus 1%.
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.
One of the Company's subsidiaries provides safety, management, and
accounting services to companies controlled by the President and Chief
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 $61,000 of other accounts receivable due from
entities that could be deemed to be under common control as of June 30, 2004.
One of the Company's insurance providers, American Inter-Fidelity Exchange
(AIFE), is managed by a Director of the Company and the Company has an
investment of $126,461 with the provider. AIFE provides auto liability
insurance to several subsidiaries of the Company as well as other entities
related to the Company by common ownership.
The Company exercised no control over the operations of AIFE. As a result,
the Company recorded its investment in AIFE under the cost method of accounting
as of June 30, 2004 and for the three months ended June 30, 2004 and 2003.
Under the cost method, the investment in AIFE is reflected at its original
amount and income is recognized only to the extent of dividends paid by the
investee. There were no dividends declared by AIFE for the six months ended
June 30, 2004 and 2003.
If AIFE incurs a net loss, the loss may be allocated to the various
policyholders based on each policyholder's premium as a percentage of the total
premiums of AIFE for the related period. There has been no such loss assessment
for six months ended June 30, 2004 or 2003. The Company currently accounts for
the majority of the premiums of AIFE. For fiscal 2003, the Company accounted for
approximately 90% of the total premium revenue of AIFE. At December 31, 2003,
AIFE had net worth of approximately $5.6 million, a portion of which is
attributable to other policyholders of AIFE.
In addition, the Chief Executive Officer and Chief Financial Officer, as
well as a director of the Company, are shareholders of American Inter-Fidelity
Corporation ("AIFC"), which serves as the attorney in fact of AIFE. AIFC is
entitled to receive a management fee from AIFE. During 2003, AIFE paid
management fees of $282,000 to AIFC which AIFC then paid as dividends totaling
$282,000 to these officers and directors of the Company.
The Company also pays a consulting fee of $2,000 per month, to a director of
the Company, relating to insurance services.
Certain Relationships and Related Transactions (Continued)
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 $2.9 million at June 30, 2004.
In addition, the Company had approximately $1.0 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, 2004 includes $559,739
due from or guaranteed by these companies.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Based on their
evaluations as of the end of the period covered by the 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) 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 of the SEC.
(b) Changes in controls. There were no changes in our internal controls
over financial reporting identified in connection with the evaluations
reported above that occurred during our last fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our
internal controls over financial reporting.
(c) Disclosure controls and procedures. Disclosure controls and
procedures are our controls and other procedures that are designed
to ensure that information 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 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 the reports that we file under the Exchange
Act is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as
appropriated to allow timely decisions regarding required disclosure.
Part II Other Information
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 thereunto duly authorized.
US 1 Industries, Inc.
Michael E. Kibler
Chief Executive Officer
Harold E. Antonson
Chief Financial Officer
August 16, 2004