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 September 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 November 10, 2004, there were 11,618,224 shares of registrant's
common stock outstanding.
US 1 INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003
Part I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
ASSETS
September 30, December 31,
2004 2003
(Unaudited)
CURRENT ASSETS:
Cash $ 0 $ 0
Accounts receivable-trade, less allowances for
doubtful accounts of $1,035,000 and $844,000
respectively 21,142,506 17,910,027
Other receivables, including receivables due
from affiliated entities of $169,988 and
$51,000, respectively 1,341,601 1,254,243
Prepaid expenses and other current assets 584,523 289,776
Current deferred tax asset 600,000 600,000
----------- ----------
Total current assets 23,668,630 20,054,046
FIXED ASSETS:
Equipment 1,667,678 1,765,979
Less accumulated depreciation and amortization (916,911) (794,676)
----------- ----------
Net fixed assets 750,767 971,303
----------- -----------
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 397,745 397,745
----------- -----------
TOTAL ASSETS $25,471,142 $22,077,094
=========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
US 1 INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, December 31,
2004 2003
(Unaudited)
CURRENT LIABILITIES:
Revolving line of credit $ 4,835,880 $ 4,884,758
Current portion of long-term debt 93,092 194,911
Accounts payable 8,668,455 7,009,625
Accrued expenses 471,917 377,475
Insurance and claims 1,203,235 788,954
Accrued compensation 370,430 47,863
Accrued interest 1,237,257 1,134,787
Fuel and other taxes payable 297,401 28,138
Accrued legal settlement 700,000 700,000
----------- ------------
Total current liabilities 17,877,667 15,166,511
----------- ------------
LONG-TERM DEBT (primarily to related parties) 2,889,708 3,176,156
MINORITY INTEREST 327,622 324,927
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, authorized 20,000,000 shares;
no par value; 11,618,224 shares outstanding 42,354,581 42,227,725
as of September 30, 2004 and December 31, 2003.
Accumulated deficit (37,978,436) (38,818,225)
----------- -----------
Total shareholders' equity 4,376,145 3,409,500
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 25,471,142 $ 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 NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
Three Months Ended Nine Months Ended
2004 2003 2004 2003
OPERATING REVENUES $36,994,175 $30,877,231 $103,699,068 $91,139,154
----------- ---------- ----------- ----------
OPERATING EXPENSES:
Purchased transportation 27,322,930 22,798,317 76,491,027 67,460,639
Commissions 3,527,479 3,238,736 10,438,148 9,209,084
Insurance and claims 1,485,184 1,418,498 4,429,498 3,878,072
Salaries, wages, and
other 2,229,806 1,656,723 6,231,446 4,852,758
Other operating expenses 1,850,427 1,440,921 5,055,003 4,260,946
----------- ---------- ---------- ----------
Total operating
expenses 36,415,826 30,553,195 102,645,122 89,661,499
----------- ---------- ---------- ----------
OPERATING INCOME 578,349 324,036 1,053,946 1,477,655
----------- ---------- ---------- ----------
NON-OPERATION INCOME (EXPENSE)
Interest income 11,036 6,802 15,505 14,161
Interest (expense) (134,314) (120,753) (331,339) (388,737)
Other income 100,020 67,347 216,471 263,288
----------- ---------- ---------- ----------
Total non-operating
(expense) (23,258) (46,604) (99,363) (111,288)
----------- ---------- ---------- ----------
NET INCOME BEFORE
MINORITY INTEREST $ 555,091 $ 277,432 $ 954,583 $ 1,366,367
Minority Interest Expense (47,124) (39,056) (114,794) (100,746)
----------- ---------- ---------- ----------
NET INCOME $ 507,967 $ 238,376 $ 839,789 $ 1,265,621
Basic Net Income $0.04 $0.02 $0.07 $0.11
Per Common Share
Diluted Net Income $0.04 $0.02 $0.07 $0.10
Per Common Share
WEIGHTED AVERAGE SHARES
OUTSTANDING - 11,618,224 11,618,224 11,618,224 11,618,224
BASIC
WEIGHTED AVERAGE
SHARES OUTSTANDING - 11,969,793 12,018,224 11,946,157 11,914,195
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 NINE MONTHS ENDED SEPTEMBER 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 32,570 0 32,570
Grant of restricted common stock 0 94,286 0 94,286
Net income for the nine months ended
September 30, 2004 0 0 839,789 839,789
Balance, September 30, 2004 11,618,224 $42,354,581 $(37,978,436) $4,376,145
The accompanying notes are in integral part of the consolidated financial statements.
US 1 INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003 (UNAUDITED)
Nine Months Ended September 30,
2004 2003
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income 839,789 1,265,621
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 245,309 230,531
Gain on disposal of assets (50,235) 0
Compensation Expense resulting from
issuance of restricted stock 94,286 62,857
Compensation Expense resulting from
issuance of equity in subsidiary 75,000 112,500
Provision for bad debts 503,503 531,030
Minority interest expense 114,794 100,746
Changes in operating assets and liabilities:
Accounts receivable - trade (3,735,982) (2,225,813)
Other receivables (87,358) 826
Prepaid expenses and other current assets (294,747) 29,082
Other assets 0 (1,218)
Accounts payable 1,658,830 1,167,731
Accrued expenses 94,442 (46,992)
Accrued interest 102,470 102,636
Insurance and claims 414,281 (204,758)
Accrued compensation 322,567 377
Fuel and other taxes payable 269,263 3,690
--------- --------
Net cash provided by operating activities 566,212 1,128,846
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to fixed assets (110,988) (151,086)
Proceeds from sales of fixed assets 136,450 15,712
-------- ---------
Net cash provided by (used in)investing activities 25,462 (135,374)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit (48,878) (23,056)
Principal payments on long-term debt (388,267) (397,062)
Repayments of shareholder loans 0 (455,801)
Distributions to minority interest (154,529) (117,553)
--------- ---------
Net cash used in financing activities (591,674) (993,472)
--------- ---------
NET DECREASE IN CASH 0 0
CASH, BEGINNING OF PERIOD 0 0
--------- ---------
CASH, END OF PERIOD 0 0
========= =========
Cash paid for interest $228,000 $286,000
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
US 1 INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
1. BASIS OF PRESENTATION
The accompanying consolidated balance sheet as of September 30, 2004 and
the consolidated statements of income, shareholders' equity and cash flows
for the three and nine month periods ended September 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
nine months ended September 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 Nine Months Ended
Numerator 2004 2003 2004 2003
Net income $ 507,967 $ 238,376 $ 839,789 $1,265,621
Dividends on preferred shared 0 0 0 0
---------- ---------- ---------- ----------
Net income available
to common shareholders
for basic EPS 507,967 238,376 839,789 1,265,621
Net income attributable to unvested
minority interest shares in
subsidiary (11,376) (4,790) (30,636) (52,772)
----------- ----------- ----------- ----------
Net income available to common
shareholders for diluted EPS 496,591 233,586 809,153 1,212,849
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 351,569 400,000 327,933 295,971
________________________________________________
Weighted average shares
outstanding for diluted
EPS 11,969,793 12,018,224 11,946,157 11,914,195
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 $5.2 million at September 30, 2004. The interest rate is based
upon certain financial covenants and may range from prime to prime less
..50%. At September 30, 2004, the interest rate on this line of credit was
at prime (4.75%). 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 September 30, 2004 the outstanding borrowings on
this line of credit were $4.8 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. At the end of September 30, 2004 the balance on this
new equipment line of credit was $0.
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
$75,000 and $112,500 for the nine months ended September 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 $47,124 and $39,056 for
the three months ended September 30, 2004 and 2003, respectively, and
$114,794 and $100,746 for the nine months ended September 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 $31,429 for both the
three months ended September 30, 2004 and 2003, respectively, and $94,286
and $62,857 for the nine months ended September 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 nine months ended
September 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.
Nine months ended September 30, 2004 Compared to the nine months ended
September 30, 2003
The following table sets forth the percentage relationships of expense
items to revenue for the nine months ended September 30, 2004 and September
30, 2003:
2004 2003
------ ------
Revenue 100.0% 100.0%
Operating expenses:
Purchased transportation 73.8 74.0
Commissions 10.0 10.1
Insurance and claims 4.3 4.3
Salaries, wages and other 6.0 5.3
Other operating expenses 4.9 4.7
------- ------
Total operating expenses 99.0 98.4
------ ------
Operating income 1.0 1.6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION (Continued)
The Company's operating revenues increased to $103.7 million for the
nine months ended September 30, 2004 from $91.1 million for the same period
in 2003. This is an increase of 13.8%. 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.
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 nine months ended September 30, 2004 from 74.0% for
the nine months ended September 30, 2003. 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 revenue.
Commissions to agents and brokers are primarily based on contractually
agreed-upon percentages of revenue. Commissions decreased slightly to 10.0%
of revenue for the nine months ended September 30, 2004 from 10.1% of
revenue for the nine months ended September 30, 2003. In total, purchased
transportation and commissions were 83.8% of revenue in 2004 compared to
84.1% of revenue in 2003. The combined decrease is partly due to the
increase of revenue by one of the Company's terminals that utilizes more
employees than agents. Agents are paid commissions where as employees are
paid wages.
Insurance and claims remained constant at 4.3% of revenue for the nine
months ended September 30, 2004 and September 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.
Salaries, wages, and fringe benefits were 6.0% of revenue for the nine
months ended September 30, 2004 compared to 5.3% of revenue for the nine
months ended September 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.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION (Continued)
Other operating expenses as a percentage of revenue increased slightly
to 4.9% of revenue for the nine months ended September 30, 2004 from 4.7%
for the nine months ended September 30, 2003. This increase is primarily due
to increased costs associated with the opening of new offices. While not
all operating expenses are directly variable with revenue, 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 $423,709. Operating income for the nine months ended
September 30, 2004 was $1,053,946 compared to $1,477,655 for the nine months
ended September 30, 2003.
Interest expense decreased by $57,398 in 2004. Interest expense for
the nine months ended September 30, 2004 was $331,339 compared to interest
expense of $388,737 for the nine months ended September 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
September 30, 2004, the interest rate charged on the loan with US Bank was
prime (4.75%). At September 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 ($231,976) for the nine months
ended September 30, 2004 versus ($277,449) for the nine months ended
September 30, 2003. This is a decrease of $45,473 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 $114,794 and $100,746 for the nine months
ended September 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 nine
months ended September 30, 2004 was $839,789 compared with $1,265,621 for
the same period in 2003.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION (Continued)
Three months ended September 30, 2004 compared to the three months ended
September 30, 2003.
The following table sets forth the percentage relationships of expense
items to revenue for the three months ended September 30, 2004 and
September 30, 2003:
2004 2003
------ ------
Revenue 100.0% 100.0%
Operating expenses:
Purchased transportation 73.9 73.8
Commissions 9.5 10.5
Insurance and claims 4.0 4.6
Salaries, wages and fringe benefits 6.0 5.4
Other operating expenses 5.0 4.7
------- ------
Total operating expenses 98.4 99.0
------ ------
Operating income 1.6 1.0
The Company's operating revenues increased to $37.0 million for the
three months ended September 30, 2004 from $30.9 million for the same
period in 2003. This is an increase of 19.8%. 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
increased slightly to 73.9% of revenue for the three months ended September
30, 2004 from 73.8% for the three months ended September 30, 2003. The
slight increase was more than offset by the decrease 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 decreased to 9.5% of
revenue for the three months ended September 30, 2004 from 10.5% of revenue
for the three months ended September 30, 2003. As previously described, the
decrease in commissions of 1.0% of revenue was partially offset by the
increase in purchased transportation. In addition, commissions as a percent
of revenue have decreased slightly due to the increase of revenue by one
of the Company's terminals that utilizes more employees than agents. Agents
are paid commissions where as employees are paid wages.
Insurance and claims decreased to 4.0% of revenue for the three months
ended September 30, 2004 from 4.6% of revenue for the three months ended
September 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 decrease of 0.6% of revenue can
be attributed to the decrease in claims incurred by certain operations of
the Company.
Salaries, wages, and fringe benefits were 6.0% of revenue for the three
months ended September 30, 2004 compared to 5.4% of revenue for the three
months ended September 30, 2003. This increase of 1.6% can partially 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 5.0% for the three months ended September 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 increased by $254,313. Operating income for the three months ended
September 30, 2004 was $578,349 compared to $324,036 for the three months
ended September 30, 2003.
Interest expense increased by $13,561, from $134,314 for the three months
ended September 30, 2004 to $120,753 for the three months ended September 30,
2003. This increase in interest expense is primarily attributable to an
increase in interest rates charged 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 September 30, 2004,
the interest rate charged on the loan with US Bank was 4.75%. At September
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 as well as gain on disposal of
equipment. Non-operating (income) expense, exclusive of interest expense,
was ($111,056) for the three months ended September 30, 2004 versus ($74,149)
for the three months ended September 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. The decrease in non-operating
(income) was offset by a gain on the disposal of equipment of approximately
$50,000.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION (Continued)
Minority interest expense of $47,124 and $39,056 for the three months
ended September 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 September 30, 2004 was $507,967 compared with $238,376 for the
same period in 2003.
Liquidity and Capital Resources
Net cash provided by operating activities decreased 0.6 million from
$1,128,846 for the nine months ended September 30, 2003 to $566,212 for the
nine months ended September 30, 2004. The decrease in net cash provided by
operating activities is attributable to decreased profitability during 2004
combined with increased working capital needs to fund continued growth of the
Company. As a result of decreased profitability, cash provided by operations
before changes in working capital decreased $0.5 million from $2.3 million at
September 30, 2003 to $1.8 million at September 30, 2004. Much of the
decreased profitability is due to costs incurred related to the start-up of
new locations which are not yet at their full revenue potential. In addition,
the Company continues to experience growth and therefore a significant amount
of the cash generated from operations is used to fund this growth and the
related working capital needs. Cash used to fund these working capital needs
increased approximately $0.1 million from $1.2 million for the nine months
ended September 30, 2003 to $1.3 million for the nine months ended September
30, 2004 as the impact of increased accounts receivable was only partially
offset by increased accounts payable and accrued expenses. Typically, the
Company pays independent owner operators and agents in 7 - 15 days. However,
the Company's customers typically pay in 30 - 45 days.
Net cash provided by (used in) investing activities was $25,462 for
the nine months ended September 30, 2004 compared to ($135,374) for the
nine months ended September 30, 2003. Net cash provided by investing
activities increased due to the sale of certain trailers at one of the
Company's operations that was closed in 2004.
Net cash used in financing activities decreased $401,798 from $993,472
for the nine months ended September 30, 2003 to $591,674 for the nine
months ended September 30, 2004. The cash used in financing activities for
2004 is primarily due to the principal payments of long-term debts.
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
September 30, 2004, the interest rate on this line of credit was at prime
(4.75%). The Company's accounts receivable, property, and other assets
collateralize advances under the agreement. Unused availability under this
line of credit was approximately $5.2 million at September 30, 2004. The
Liquidity and Capital Resources (Continued)
Chief Executive Officer and Chief Financial Officer of the Company
guarantee borrowings of up to $1 million. At September 30, 2004, the
outstanding borrowings on this line of credit were $4.8 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.
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 (at September 30, 2004 the rate was 4.75%).
The interest rate is based on certain financial covenants and may range from
prime to prime less .5%. 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 $170,000 of other accounts receivable due
from entities that could be deemed to be under common control as of September
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 September 30, 2004 and for
the three and nine months ended September 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 nine months ended September 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 nine months ended September 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.
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
September 30, 2004. In addition, the Company had approximately $1.2 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 September 30, 2004 includes
$554,759 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 appropriate 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
Form 8-K filed on November 11, 2004, furnishing information regarding a
waiver the Company was issued from U.S. Bank, National Association ("U.S.
Bank") with respect to the Company's financial covenant default of the
Maximum Unsubordinated Indebtedness to EBITDA Ratio of 3-to-1 being exceeded
for the period ended June 30, 2004.
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
November 15, 2004