Commissions totaled $13,492,000 for the year ended December 31, 2007, as compared with $11,044,000 in the prior year, an increase of 22%. This increase is the direct result of the increase in revenues resulting from the continued expansion of our agent network and customer base. As a percentage of net revenues, commissions were 63.3% for the year ended December 31, 2007 as compared with 62.3% in the prior year. This increase is the direct result of the expansion of our agent network at higher commission rates, additional bonuses earned based upon the achievement of certain monthly benchmarks, stock based compensation expense, and cost associated with the addition of new agents.
Operating expenses totaled $4,870,000 for the year ended December 31, 2007, as compared with $3,840,000 in the prior year. As a percentage of net revenues, operating expenses were 22.9% for the year ended December 31, 2007 as compared with 21.6% in the prior year. This increase is the direct result of the increase in selling, general and administrative expenses in connection with our business expansion. We presently have adequate facilities and management to handle our present and anticipated transaction volume in 2008 without a significant increase in overhead.
Interest expense was $277,000 for the year ended December 31, 2007 as compared with $113,000 in the prior year. This increase is primarily the result of increased average borrowings to support the working capital needs generated primarily by the increase in revenues.
Income tax expense was $1,066,000 for the year ended December 31, 2007 as compared to a net income tax benefit of $882,000 in the prior year. The 2007 income tax expense reflects an effective federal and state tax rate of 39.9% and is comprised of a deferred tax expense of $910,000 related to the utilization of our federal tax loss carryforward and a current state tax expense of $156,000. In 2006, based upon available objective evidence, including our post-merger history of profitability, we concluded that it was more likely than not that forecasted taxable income would be sufficient to utilize all of our net operating loss carryforwards before their expiration in 2014. Accordingly, in 2006 the remaining valuation allowance was reversed and a deferred tax benefit of $1,965,000 was recorded.
During the year ended December 31, 2006, we continued to implement our strategic growth business plan consisting primarily of the expansion of client services, the opening of regional operations centers in key geographical markets and the addition of independent sales agents providing brokerage and contract carrier services. Our net revenues (gross revenues less cost of transportation) are the primary indicator of our ability to source, add value and resell services that are provided by third parties and are considered to be the primary measurement of growth. Therefore, the discussion of the results of operations below focuses on the changes in our net revenues. The increases in net revenues and all related cost and expense categories are the direct result of our business expansion.
The following table represents certain statement of operation data as a percentage of net revenues:
| | | | | | | |
| | 2006 | | 2005 | |
| |
| |
| |
|
Net revenues | | | 100.0 | % | | 100.0 | % |
| |
|
| |
|
| |
| | | | | | | |
Commissions | | | 62.3 | % | | 61.6 | % |
Operating expenses | | | 21.6 | % | | 22.2 | % |
Interest expense | | | .6 | % | | .4 | % |
Income taxes (benefit) | | | (5.0 | )% | | (10.8 | )% |
| |
|
| |
|
| |
| | | | | | | |
Net income | | | 20.5 | % | | 26.6 | % |
| |
|
| |
|
| |
Revenues
Gross revenues, consisting of freight fees and other related services revenue, totaled $84,111,000 for the year ended December 31, 2006, as compared with $68,040,000 in the prior year, an increase of 24%. Net revenues were $17,743,000 for the year ended December 31, 2006, as compared with $13,554,000 in the prior year, an increase of 31%.
Gross revenues from brokerage services increased to $73,036,000 from $58,150,000 and net revenues increased to $15,997,000 from $11,887,000 in the prior year. This increase is the direct result of the continued expansion of our agent network and customer base which resulted in a 17% increase in the number of transactions processed and a 8% increase in the average dollar amount per load.
Gross revenues from contract carrier services increased to $11,075,000 from $9,890,000 and net revenues increased to $1,746,000 from $1,667,000 in the prior year. Gross revenues increased approximately 12% for the year. However, there were fluctuations during the year in the number of agents and owner-operators due to the termination of agents and the addition of new agents. As a result of these fluctuations, gross revenues during the first quarter of 2006 increased by 94% over the corresponding 2005 period and decreased 9%, 17% and 6% for the second, third and fourth quarters, respectively, as compared to the corresponding quarters of 2005. In the fourth quarter of 2006, we upgraded our driver safety and compliance standards under the direction of a new safety director as part of our effort to improve safety ratings and the quality of our owner operator network. These changes resulted in a short-term reduction in the number of owner operators and corresponding number of transactions in the fourth quarter of 2006 and the first and second quarters of 2007, but did not have any long-term adverse effect.
Costs and expenses
Commissions totaled $11,044,000 for the year ended December 31, 2006, as compared with $8,348,000 in the prior year, an increase of 32%. This increase is the direct result of the continued expansion of our agent network and customer base. As a percentage of net revenues, commissions were 62.3% for the year ended December 31, 2006 as compared with 61.6% in the prior year. This increase is the direct result of the expansion of our agent network at higher commission rates, additional bonuses earned after certain monthly benchmarks are achieved, stock based compensation expense, and cost associated with the new agent additions.
Operating expenses totaled $3,840,000 for the year ended December 31, 2006, as compared with $3,005,000 in the prior year. As a percentage of net revenues, operating expenses were 21.6% for the year
16
ended December 31, 2006 as compared with 22.2% in the prior year. This decrease is the direct result of our ability to leverage selling, general and administrative expenses in connection with business expansion. We have increased administrative staff commensurate with the increase in transaction volume. In February 2005, we moved our headquarters increasing our space to 5,300 square feet.
Interest expense was $113,000 for the year ended December 31, 2006 as compared with $56,000 in the prior year. This increase is primarily the result of increased average borrowings and the increase in the prime lending rate from 5.25% at the beginning of 2005 to 8.25% by July 2006. As of September 2006, our line of credit facility is at a interest rate of LIBOR plus 2%, or approximately 7.3% for the period from September through December 2006.
Income tax
The income tax benefit of $882,000 for the year ended December 31, 2006 consisted of a benefit of $1,965,000 resulting from the anticipated future utilization of an available federal tax loss carryforward, net of the utilization of the deferred tax benefit of $925,000 and state income taxes of $158,000. The income tax benefit of $1,463,000 for the year ended December 31, 2005 consisted of a benefit of $2,304,000 resulting from the anticipated future utilization of an available federal tax loss carryforward, net of the utilization of the deferred tax benefit of $718,000 and state income taxes of $123,000. Based upon available objective evidence, including our post-merger history of profitability, we believe that it is more likely than not that forecasted taxable income will be sufficient to utilize all of the net operating loss carryforward before its expiration in 2014. Accordingly, in 2006 the valuation allowance was reduced by $1,965,000.
Trends and uncertainties
The transportation industry is highly competitive and highly fragmented. In our brokerage services, our primary competitors are other non-asset based as well as asset based third party logistics companies, freight brokers, carriers offering logistics services and freight forwarders. In our contract carrier services, our competitors are other contract carriers and common carriers. We also compete with customers’ and shippers’ internal traffic and transportation departments as well as carriers’ internal sales and marketing departments directly seeking shippers’ freight. We anticipate that competition for our services will continue to increase. Many of our competitors have substantially greater capital resources, sales and marketing resources and experience. We cannot assure you that we will be able to effectively compete with our competitors in effecting our business expansion plans. The most significant trend contributing to our growth during the past two years has been the expansion of our brokerage services agent network and contract carrier agent and owner operator network. Sales agents are independent contractors and, as such, there are no assurances that we can either maintain our existing agent network or continue to expand this network.
For the year ended December 31, 2007, we increased gross revenues from $84.1 million to $110.3 million. As of December 31, 2007, we had an accumulated deficit of $5.9 million compared to $7.5 million at December 31, 2006. Factors that could adversely affect our operating results include:
| | |
| • | the success of Sunteck in expanding its business operations; and |
| | |
| • | changes in general economic conditions. |
Depending on our ability to generate revenues, we may require additional funds to expand our business operations and for working capital and general corporate purposes. Any additional equity financing may be dilutive to stockholders, and debt financings may involve restrictive covenants that further limit our ability to make decisions that we believe will be in our best interests. In the event we cannot obtain additional financing
17
on terms acceptable to us when required, our ability to expand our operations may be materially adversely affected.
Liquidity and capital resources
During the past two years, our sources for cash have been cash flow generated from operations and available borrowings under our line of credit.
At December 31, 2007, we had a balance outstanding of $8,790,000 under our $10,500,000 line of credit. The line of credit is subject to the maintenance of certain financial covenants, is secured by accounts receivable and other operating assets, and matures in June 2009. We believe that we have sufficient working capital to meet our short-term operating needs and that we will be able to increase, extend or replace the line of credit on terms acceptable to us.
At December 31, 2007, we had liquid assets of approximately $270,000. Available cash is used to reduce borrowings on our line of credit.
The total amount of debt outstanding at December 31, 2007 and 2006 was $8,790,000 and $3,451,000, respectively. The following table presents our debt instruments and their weighted average interest rates at December 31, 2007 and 2006, respectively:
| | | | | | | | | | | | | |
| | Balance | | Weighted
Average
Rate | | Balance | | Weighted
Average
Rate | |
| |
|
|
|
|
|
|
| |
| | 2007 | | 2006 | |
| |
|
|
|
|
|
|
|
|
|
|
| |
| | | | | | | | | | | | | |
Line of Credit | | $ | 8,790,000 | | | 5.9% | | $ | 3,451,000 | | | 7.3% | |
Inflation and changing prices had no material impact on our revenues or the results of operations for the year ended December 31, 2007.
Critical Accounting Policies
Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Note 1 of the Notes to Financial Statements includes a summary of the significant accounting policies and methods used in the preparation of our financial statements. The most significant areas involving our estimates and assumptions are described below. Actual results could differ materially from our estimates under different assumptions or conditions.
Revenue Recognition
As a third party transportation logistics provider, we act as the shippers’ agent and arrange for a carrier to handle the freight. Gross revenues consist of the total dollar value of services purchased by shippers. Revenue is recognized upon the delivery of freight, at which time the related transportation cost, including commission, is also recognized. At that time, our obligations are completed and collection of receivables is reasonably assured.
18
Emerging Issues Task Force No. 99-19, “Reporting Revenues Gross as a Principal Versus Net as an Agent” (EITF 99-19), establishes criteria for recognizing revenues on a gross or net basis. We are the primary obligor in our transactions, have all credit risk, maintain substantially all risk and rewards, have discretion in selecting the supplier, and latitude in pricing decisions. Accordingly, we record all transactions at the gross amount, consistent with the provisions of EITF 99-19.
Income Taxes
The deferred tax asset represents expected future tax savings resulting from our net operating loss carryforward. As of December 31, 2007, we had a net operating loss carryforward of approximately $8.9 million for federal income tax purposes which expire through 2014. Utilization of this benefit is primarily subject to the extent of our future earnings, and may be limited by, among other things, stockholder changes, including the possible issuance of additional shares in one or more financing or acquisition transactions. As of December, 2006, we eliminated any valuation allowance for the future tax savings as management believes it is more likely than not that they will be realized by the end of the carryforward period.
Provision For Doubtful Accounts
We continuously monitor the creditworthiness of our customers and have established an allowance for amounts that may become uncollectible in the future based on current economic trends, our historical payment and bad debt write-off experience, and any specific customer related collection issues.
Recently Issued Accounting Standards
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (FIN 48), which clarifies the accounting for uncertainty in tax positions. FIN 48 requires the recognition of a tax position when it is more likely than not that the tax position will be sustained upon examination by taxing authorities, based upon the technical merits of the position. We adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 did not have a material impact on our financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements” (SFAS 157), which provides guidance for using fair value to measure assets and liabilities. SFAS 157 defines fair value and establishes a framework for measuring fair value; however, SFAS 157 does not expand the use of fair value in any new circumstances. The provisions of SFAS 157 are effective for us as of January 1, 2008. We do not expect the adoption of SFAS 157 to have a material impact on our financial statements.
In February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159), which permits entities to choose to measure many financial assets and liabilities at fair value. The fair value option may be applied, subject to certain exceptions, on an instrument by instrument basis; is irrevocable; and is applied only to entire instruments and not to portions of instruments. The provisions of SFAS 159 are effective for us as of January 1, 2008. We do not expect the adoption of SFAS 159 to have a material impact on our financial statements.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (SFAS 141(R)), which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The Statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for us as of
19
January 1, 2009. The provisions of SFAS 141(R) will impact us only if we are party to a business combination after SFAS 141(R) has been adopted.
Off-balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2007:
| | | | | | | | | | | | | | | | |
| | Payments due by period | |
| |
| |
Contractual Obligations | | Total | | Less than 1
year | | 1-3 years | | 3-5 years | | More than 5
years | |
|
|
|
|
|
|
|
|
|
|
| |
Operating Lease Obligations | | $ | 159,000 | | $ | 65,000 | | $ | 94,000 | | | — | | | — | |
Line of Credit | | | 8,790,000 | | | — | | $ | 8,790,000 | | | — | | | — | |
Total | | $ | 8,949,000 | | $ | 65,000 | | $ | 8,884,000 | | | — | | | — | |
| |
Item 7A. | QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
None.
| |
Item 8. | FINANCIAL STATEMENTS |
The response to this item is submitted as a separate section of this report beginning on page F-1.
| |
Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES |
None.
| |
Item 9A(T) | CONTROLS AND PROCEDURES |
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our president and chief financial officer, carried out an evaluation of the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-15(e) and 15-d-15(e)) as of the end of the period covered by this report (the “Evaluation Date”). Based upon that evaluation, the president and chief financial officer concluded that as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our president and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Our management, including our president and chief financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control
20
system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within AutoInfo have been detected.
(b) Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2007. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Our management has concluded that, as of December 31, 2007, except as described in the following paragraph, our internal control over financial reporting is effective based on these criteria.
Management has concluded that, as of December 31, 2007, our controls related to approvals necessary for transactions with management and non-ordinary course transactions were not effective and therefore represent a material weakness. In order to correct this material weakness, in 2008 the board of directors and the audit committee instituted the following corrective actions: 1) pre-approval of all transactions with management; 2) pre-approval of all non-ordinary course transactions in excess of $50,000; and 3) periodic review of advances to our personnel.
Subsequent to December 31, 2007, it was brought to management’s attention that a transaction entered into between our company and Michael Williams, our chief operating officer and general counsel, may have violated Section 13(k) of the Exchange Act which makes it unlawful for any issuer to “extend or maintain credit in the form of a personal loan to or for any director or executive officer.” The transaction in question involved a loan from Mr. Williams to two of our independent sales representatives, the proceeds of which were used by them to exercise outstanding stock options. In turn, we made a secured loan to Mr. Williams. After consulting with independent counsel and our audit committee, we took appropriate steps to rescind the transaction and restore the parties thereto, including us, to thestatus quo ante.The financial statements included in this Report have been adjusted to reflect this rescission (which adjustments were not material).
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this annual report.
(c) Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| |
Item 9B. | OTHER INFORMATION |
None.
21
PART III
| |
Item 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The following table sets forth the names, ages and positions of our directors and executive officers:
| | | | |
Name | | Age | | Position |
| |
| |
|
|
Peter C. Einselen | | 68 | | Director |
Thomas C. Robertson | | 62 | | Director |
Harry Wachtel | | 49 | | President, chief executive officer and director |
Mark Weiss | | 47 | | National account executive and director |
William Wunderlich | | 60 | | Chief financial officer |
Michael P. Williams | | 41 | | Chief operating officer and general counsel |
PETER C. EINSELEN has been a director since January 1999. Mr. Einselen has been an account executive since 1990 and served as senior vice president from 1990 to 2001 of Anderson & Strudwick, a brokerage firm. From 1983 to 1990, Mr. Einselen was employed by Scott and Stringfellow, Incorporated, a brokerage firm.
THOMAS C. ROBERTSON has been a director since January 1999. Mr. Robertson has been senior vice president since 2005 and was president and chief financial officer from 1988 to 2005 and a director from 1988 to 2006 of Anderson & Strudwick, a brokerage firm. Mr. Robertson has been president of Gardner & Robertson, a money management firm, since 1997.
HARRY WACHTEL joined us in conjunction with the acquisition of Sunteck and has been a director, and our president and chief executive officer since December 7, 2000. Since 1997, he has been president of Sunteck. From 1992 to 1997, he served as vice president of sales and marketing for Pioneer Services, Inc., a third party, non-asset based transportation logistics provider.
MARK WEISS joined us in conjunction with the acquisition of Sunteck and has been a director since December 7, 2000. Since 1997, he has been employed by Sunteck as a national account executive. From 1994 to 1997 he served as a national account executive for Pioneer Services, Inc., a third party, non-asset based transportation logistics provider. Mr. Weiss is the brother-in-law of Mr. Wunderlich, our executive vice president and chief financial officer.
WILLIAM WUNDERLICH joined us in October 1992 as our vice president - finance, became chief financial officer in January 1993, president in January 1999 and, in conjunction with the acquisition of Sunteck, became executive vice president in December 2000. From 1990 to 1992, he served as vice president of Goldstein Affiliates, Inc., a public adjusting company. From 1981 to 1990, he served as executive vice president, chief financial officer and a director of Novo Corporation, a manufacturer of consumer products. Mr. Wunderlich is a Certified Public Accountant with a B.A. degree in Accounting and Economics from the City University of New York at Queens College. Mr. Wunderlich is the brother-in-law of Mr. Weiss, one of our directors.
MICHAEL P. WILLIAMS joined us in January 2007 as our chief operating officer and general counsel. From 2002 to 2006, Mr. Williams served as general counsel and vice president of legal and business affairs for Vexure, Inc., a logistics company. Prior to that, from 1999 to 2002, Mr. Williams also served as general counsel and vice president of legal and business affairs for Stonier Transportation Group, Inc., a trucking and brokerage company. During his tenure with Stonier and Vexure, Mr. Williams gained experience
22
handling customer and vendor contract negotiations, risk management strategies, human resources and assets management, and transportation and employment litigation matters. Mr. Williams received his juris doctor cum laude from Thomas Cooley Law School, Lansing, Michigan and his masters degree (LL.M.) in taxation from the University of Florida, Gainesville. He has been a member of the Florida Bar since 1995.
Committees of the Board of Directors
Our board of directors has an audit committee and a compensation committee. The audit committee reviews the scope and results of the audit and other services provided by our independent accountants and our internal controls. The compensation committee is responsible for the approval of compensation arrangements for our officers and the review of our compensation plans and policies. Each committee is comprised of Messrs. Einselen and Robertson, our non-employee independent outside directors.
Audit Committee Matters
Under its charter, the audit committee must pre-approve all engagements of our independent auditor unless an exception to such pre-approval exists under the Exchange Act or the rules of the Securities and Exchange Commission (SEC). Each year, the independent auditor’s retention to audit our financial statements, including the associated fee, is approved by the committee before the filing of the preceding year’s annual report on Form 10-K. At the beginning of the fiscal year, the audit committee will evaluate other known potential engagements of the independent auditor, including the scope of the work proposed to be performed and the proposed fees, and approve or reject each service, taking into account whether the services are permissible under applicable law and the possible impact of each non-audit service on the independent auditor’s independence from management. At each subsequent committee meeting, the committee will receive updates on the services actually provided by the independent auditor, and management may present additional services for approval. Typically, these would be services such as due diligence for an acquisition that would not have been known at the beginning of the year.
Since the May 6, 2003 effective date of the SEC rules stating that an auditor is not independent of an audit client if the services it provides to the client are not appropriately approved, each new engagement of Dworken, Hillman, LaMorte & Sterczala, P.C. was approved in advance by the audit committee, and none of those engagements made use of thede minimus exception to pre-approval contained in the SEC’s rules.
Our board has determined that the chairman of the audit committee, Mr. Robertson, is an “audit committee financial expert,” as that term is defined in Item 407(d)(5) of Regulation S-K, and “independent” for purposes of current and recently-adopted Nasdaq listing standards and Section 10A(m)(3) of the Securities Exchange Act of 1934.
Code of Ethics
We have adopted a code of ethics that applies to our principal executive officer, principal financial officer and other persons performing similar functions. This code of ethics is posted on our website atwww.suntecktransport.com.
Section 16(a) beneficial ownership reporting compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and persons who own more than ten percent of a registered class of our equity securities, to file reports of ownership and changes in ownership with the SEC. Officers, directors and greater than ten-percent stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. Based solely on review of the copies of such forms furnished to us, or written representations that no Forms 5 were required, we believe that
23
all Section 16(a) filing requirements applicable to our officers and directors were complied with except that our chief financial officer did not timely file one Form 4 to report one transaction in 2007 and each of our non-employee directors did not timely file a Form 4 to report four option grant transactions in 2006.
| |
Item 11. | EXECUTIVE COMPENSATION |
Compensation Discussion and Analysis
We provide what we believe is a competitive total compensation package to our executive management team through a combination of base salary, annual cash and equity incentives and the right to participate in our broad-based benefits program. We place significant emphasis on incentive compensation directly related to our financial performance.
This Compensation Discussion and Analysis explains our compensation philosophy, policies and practices with respect to our named executive officers which includes our chief executive officer, chief financial officer, and our national account executive.
The Objectives of our Executive Compensation Program
Our compensation committee is responsible for establishing and administering our policies governing the compensation for all of our executive officers. The compensation committee is composed entirely of non-employee independent directors. See “Committees of the Board of Directors” above.
The purpose of our executive compensation program is to attract, retain and motivate qualified executives to manage our business so as to maximize profits and stockholder value. Executive compensation in the aggregate is made up principally of the executive’s annual base salary, a bonus based upon operating earnings, a discretionary bonus which may be awarded by our compensation committee and awards of stock or stock options under our Stock Option Plans. Our compensation committee annually considers and makes recommendations to our board of directors as to executive compensation including changes in base salary, bonuses and awards of our stock or stock options.
Consistent with the above-noted purpose of the executive compensation program, in recommending the aggregate annual compensation of our executive officers, our compensation committee considers our overall performance and the individual contribution and performance of the executive with our overall performance being the more significant factor. While stockholders’ total return is important and is considered by the compensation committee, it is subject to the vagaries of the public market place. Our executive compensation program focuses on our strategic plans, corporate performance measures, and specific corporate goals which should lead to a favorable stock price. The corporate performance measures which our compensation committee considers include sales, earnings, return on equity and comparisons of sales and earnings with prior years and with budgets.
Our compensation committee does not rely on any fixed formulae or specific numerical criteria in determining an executive’s aggregate compensation. It considers corporate and personal performance criteria, competitive compensation levels, the economic environment and changes in the cost of living as well as the recommendations of management. Our compensation committee then exercises business judgment based on all of these criteria and the purposes of the executive compensation program.
24
The Elements of Our Executive Compensation Program
Overall, our executive compensation programs are designed to be consistent with the objectives and principles set forth above. The basic elements of our executive compensation programs are summarized in the table below, followed by a more detailed discussion of each element of compensation.
| | | | |
Element | | Characteristics | | Purpose |
| |
| |
|
Base salary | | Fixed annual cash compensation; all executives are eligible for periodic increases in base salary based on performance; targeted at the median market pay level. | | Keep our annual compensation competitive with the market for skills and experience necessary to meet the requirements of the executive’s role with us. |
| | | | |
Incentive bonus awards | | Performance-based annual cash and equity incentive earned based on company and individual performance against target performance levels; targeted at the median market pay level. | | Motivate and reward for the achievement and over-performance of our critical financial and strategic goals. Amounts earned for achievement of target performance levels based on our annual budget is designed to provide a market-competitive pay package at median performance; potential for lesser or greater amounts are intended to motivate participants to achieve or exceed our financial performance goals and to not reward if performance goals are not met. |
| | | | |
Health & welfare benefits | | Fixed component. The same/comparable health& welfare benefits (medical, dental, vision, disability insurance and life insurance) are available for all full-time employees. | | Provides benefits to meet the health and welfare needs of employees and their families. |
Annual Compensation
To attract and retain executives with the ability and the experience necessary to lead us and deliver strong performance to our stockholders, we provide a competitive total compensation package. Base salaries are established considering individual performance and experience, to ensure that each executive is appropriately compensated.
Base Salary
Our compensation committee reviews salary ranges and individual salaries for our executive officers and establishes the base salary for each executive officer based on the following:
| | |
| • | consideration of median pay levels in our peer group among individuals in comparable positions with transferable skills within the transportation industry and comparable companies in general industry; |
| | |
| • | internal factors, such as, the individual’s performance and experience, and the pay of others on the executive team; |
| | |
| • | our overall performance and the individual contribution and performance of the executive with our overall performance being the more significant factor; and |
25
| | |
| • | with a focus on our strategic plans, corporate performance measures, and specific corporate goals which should lead to a favorable stock price including, our sales, earnings, return on equity and comparisons of sales and earnings with prior years and with budgets. |
When establishing the base salary of any executive officer, we believe that a competitive base salary is necessary to attract and retain an executive management team with the appropriate abilities and experience required to lead us. The base salaries paid to our named executive officers are set forth below in the Summary Compensation Table. We believe that the base salary paid to our executive officers during 2007 achieves our executive compensation objectives, compares favorably to our peer group and is within our target of providing a base salary at the market median.
Incentive Bonus Awards
Cash Bonuses
Cash incentive bonus awards are solely based on established and pre-approved percentages of pre-tax profit levels, are paid quarterly and adjusted on an annual basis. Our compensation committee also exercises discretion adjusting awards based on its consideration of our overall performance during the year and each executive officer’s individual performance, other than the chief executive officer and the chief financial officer, based on a review of the executive’s performance as communicated to the compensation committee by the chief executive officer.
Health and Welfare Benefits
All full-time employees, including our named executive officers, may participate in our health and welfare benefit programs, including medical, dental and vision care coverage, disability insurance and life insurance.
Overview of 2007 Compensation
We believe that the total compensation paid to our named executive officers for the fiscal year ended December 31, 2007 achieves the overall objectives of our executive compensation program. In accordance with our overall objectives, executive compensation for 2007 was competitive with our peer group and was weighted more heavily to pay for performance.
Employment Agreements, Severance Benefits and Change in Control Provisions
We have employment agreements with our chief executive officer, Harry M. Wachtel, and our chief financial officer, William I. Wunderlich. We entered into these agreements, effective January 1, 2007, to ensure the performance of their roles for an extended period of time. In addition, we also considered the critical nature of the position and our need to retain them when we committed to these agreements. The agreements provide for annual base salaries of $250,000 and $175,000, respectively, and for participation in all executive benefit plans. Each of Mr. Wachtel’s and Mr. Wunderlich’s agreements provide that they will each be entitled to a bonus equal to 10% of our consolidated pre-tax profit (as defined in their respective employment agreements) up to $1,250,000 and 5% of our consolidated pre-tax profit in excess of $1,250,000. Annual salaries and bonuses shall not exceed $750,000 for Mr. Wachtel and $675,000 for Mr. Wunderlich. The employment contracts with both Mr. Wachtel and Mr. Wunderlich are for terms expiring in December 2011. If either is terminated for cause or terminates without good reason (as defined in the agreements), we are obligated to pay only those wages and bonuses pursuant to the terms of our annual incentive plan and other compensation then vested. If either Mr. Wachtel or Mr. Wunderlich is terminated without cause or if either
26
terminates his employment agreement for good reason (as defined in the agreements), in addition to the payment of amounts then vested, in exchange for a general release of all claims, such executive is entitled to:
| |
• | The immediate vesting of any unvested stock options and one-year from the date of such termination to exercise such options; |
| |
• | Salary for the remaining term of the agreement, if any; and |
| |
• | Bonus based on a pre-determined percentage of pre-tax profit for the remaining term of the agreement, if any. |
We have granted options that remain outstanding under our 2006 Incentive Stock Option Plan (the “2006 Plan”). The 2006 Plan contains certain change in control provisions to ensure that our executives remain with us through the closing of any sale of the business.
The 2006 Plan
Under our 2006 Plan, in the event of a “change in control” as defined in the 2006 Plan, the following occurs with respect to options granted under the 2006 Plan:
|
• Each outstanding option automatically accelerates so that each option becomes fully exercisable for all of the shares of the related class of common stock at the time subject to such option immediately before the change in control; |
| |
| A change of control for purposes of the 2006 Plan is deemed to have occurred if: |
| |
| • Any “person” (a) other than us or any of our subsidiaries, (b) any of our or our subsidiaries’ employee benefit plans, (c) any “affiliate,” (d) a company owned, directly or indirectly, by our stockholders, or (e) an underwriter temporarily holding our securities pursuant to an offering of such securities, becomes the “beneficial owner,” directly or indirectly, of more than 50% of our voting stock; |
| |
| • The individuals who constitute our board on the effective date of the 2006 Plan (or any individual who was appointed to the board of directors by a majority of the individuals who constitute our board of directors as of the effective date of the 2006 Plan) cease for any reason to constitute at least a majority of our board of directors. |
| |
| • A merger or consolidation transferring greater than 50% of the voting power of our outstanding securities to a person or persons different from the persons holding those securities immediately prior to such transaction; or |
| |
| • The disposition of all or substantially all of our assets in a complete liquidation or dissolution. |
Tax Deductibility of Executive Compensation
Section 162(m) of the Internal Revenue Code of 1996, as amended (the “Code”), generally disallows a tax deduction to public companies for compensation over $1 million paid to the chief executive officer and four other most highly compensated executive officers, unless the compensation is considered performance based. The compensation disclosed in this report does not exceed the $1 million limit, and executive compensation for 2007 is also expected to qualify for deductibility. We currently intend to structure the performance-based portion of our executive officers’ compensation to achieve maximum deductibility under Section 162(m) of the code with minimal sacrifices in flexibility and corporate objective.
Although deductibility of compensation is preferred, tax deductibility is not a primary objective of our compensation programs. We believe that achieving our compensation objectives set forth above is more
27
important than the benefit of tax deductibility and we reserve the right to maintain flexibility in how we compensate our executive officers that may result in limiting the deductibility of amounts of compensation from time to time.
Summary Compensation Table
The following table sets forth certain information with respect to compensation for the years ended December 31, 2007 and 2006 earned by or paid to our chief executive officer and our two other most highly compensated executive officers in 2007 whose total compensation exceeded $100,000 (the “named executive officers”).
Summary Compensation Table
| | | | | | | | | | | | | | | |
Name and Principal
Position | | Year | | Salary ($) | | | Bonus ($) | | | Total ($) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
Harry M. Wachtel,
President and chief
executive officer | | 2007
2006 | | $
$ | 250,000
250,000 | | | $
$ | 227,000
269,000 | | | $
$ | 477,000
519,000 | | |
William I. Wunderlich,
Executive vice president
and chief financial officer | | 2007
2006 | | $
$ | 175,000
175,000 | | | $
$ | 227,000
229,000 | | | $
$ | 402,000
404,000 | | |
Michael P. Williams,
Chief operating officer | | 2007
2006 | | $ | 175,000
— | | | $ | 25,000
— | | | $ | 200,000
— | | |
Discussion of Summary Compensation
Our executive compensation policies and practices, pursuant to which the compensation set forth in the Summary Compensation Table was paid, are described above under “Compensation Discussion and Analysis.” A summary of certain material terms of our compensation plans and arrangements is set forth below.
Indemnification Arrangements
Our Certificate of Incorporation provides that we indemnify and hold harmless each of our directors and officers to the fullest extent authorized by the Delaware General Corporation Law, against all expense, liability and loss (including attorney’s fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith.
Our Certificate of Incorporation also provides that a director will not be personally liable to us or to our stockholders for monetary damages for breach of the fiduciary duty of care as a director. This provision does not eliminate or limit the liability of a director:
| | |
| • | for breach of his or her duty of loyalty to us or to our stockholders; |
| | |
| • | for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; |
| | |
| • | under Section 174 of the Delaware General Corporation Law (relating to unlawful payments or dividends or unlawful stock repurchases or redemptions); or |
| | |
| • | for any improper benefit. |
28
Outstanding Equity Awards
The following table sets forth certain information with respect to outstanding equity awards at December 31, 2007 with respect to the named executive officers.
Outstanding Equity Awards at Fiscal Year-End
| | | | | | | | | | | | | | |
| | | | | Option Awards | |
| |
|
|
|
|
|
| | | | | | |
Name | | Number of Securities
Underlying Unexercised
Options
Exercisable | | Option
Exercise
Price | | Option
Expiration
Date | |
| |
| |
| |
| |
Harry M. Wachtel | | | | 500,000 (1 | ) | | | $ | 1.173 | | | | 1/10/2010 | |
William I. Wunderlich | | | | 300,000 (1 | ) | | | $ | 1.173 | | | | 1/10/2010 | |
William I. Wunderlich | | | | 500,000 (1 | ) | | | $ | 0.10 | | | | 11/30/2009 | |
Michael P. Williams | | | | 600,000 (2 | ) | | | $ | 1.12 | | | | 6/6/2012 | |
| | |
|
| |
| |
| (1) Fully vested |
| |
| (2) 50,000 vested as of December 31, 2007 |
Compensation of Directors
We do not pay any directors’ fees. Directors are reimbursed for the costs relating to attending board and committee meetings. During 2007, Peter C. Einselen and Thomas C. Robertson, our non-employee directors, each were granted options to purchase 100,000 shares of our common stock at $1.173 per share, 115% of the fair market value on the date of grant.
The following table provides compensation information for the years ended December 31, 2007 and 2006 for each of the independent members of our board of directors.
Director Compensation
| | | | | | | | | | | | | | |
Name | | Year | | Option Awards (1) (2) | | Total | |
| |
| |
| |
| |
Thomas C. Robertson | | | 2007 | | | $ | 8,300 | | | | $ | 8,300 | | |
| | | 2006 | | | $ | 21,700 | | | | $ | 21,700 | | |
Peter C. Einselen | | | 2007 | | | $ | 8,300 | | | | $ | 8,300 | | |
| | | 2006 | | | $ | 21,700 | | | | $ | 21,700 | | |
| | |
|
| |
| (1) Amounts are calculated using the provisions of Statement of Financial Accounting Standards (SFAS) No. 123R, Share-based Payments. |
| |
| (2) During 2007, each of Mr. Robertson and Mr. Einselen was granted one option award on 1/12/2007 exercisable for 100,000 shares of our common stock, respectively. The fair value (computed in accordance with SFAS 123R) on such date was $8,300, respectively. During 2006, each of Mr. Robertson and Mr. Einselen was granted four option awards exercisable for 100,000 shares of our common stock in the aggregate, respectively. Each award was for options exercisable for 25,000 shares |
29
| |
| of our common stock. The award grant dates were 1/26/2006, 4/2/2006 7/14/2006 and 10/12/2006 and the fair values (computed in accordance with SFAS 123R) on such dates were $3,400, $4,500, $7,900 and $5,900, respectively. |
| | | | | | | | | | | | | | | | |
| | Equity Compensation Plan Information
Year Ended December 31, 2007 | | | | | | |
| | | | | | | |
Plan Category | | Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights | | Weighted-average
exercise price of
outstanding options,
warrants and rights | | Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a)) | |
| |
| |
| |
| |
| | (a) | | (b) | | (c) | |
Equity compensation plans approved by security holders (1985, 1986, 1989, 1992, 1997, 1999, 2003 and 2006) | | | | 6,162,000 | | | | $ | 0.72 | | | | | 2,816,000 | | |
|
Equity compensation plans not approved by security holders (1) | | | | 6,649,000 | | | | $ | 0.72 | | | | | 1,660,000 | | |
| | | |
| | | |
|
| | | | |
| | |
|
Total | | | | 12,811,000 | | | | $ | 0.72 | | | | | 4,476,000 | | |
| | | |
| | | |
|
| | | | |
| | |
| | |
|
(1) | | Includes the following equity compensation plans: |
| | |
| • | In 2006, we established the 2006 Independent Sales Agent Stock Option Plan (the “Sales Agent Plan”) to align the interests of our independent sales agents and affiliates with those of our stockholders, to afford an incentive to such sales agents to continue as such, to increase their efforts on our behalf and to promote the success of our business. Generally, the Sales Agent Plan is administered by our board of directors and provides (i) for the granting of non-qualified stock options, (ii) that the maximum term for options granted under the plan is 10 years and (iii) that the exercise price for the options may not be less than 115% of the fair market value of our common stock on the date of grant. |
| | |
| • | In 2005, we established the 2005 Independent Sales Agent Stock Option Plan (the “2005 Sales Agent Plan”) to align the interests of our independent sales agents and affiliates with those of our stockholders, to afford an incentive to such sales agents to continue as such, to increase their efforts on our behalf and to promote the success of our business. Generally, the 2005 Sales Agent Plan is administered by our board of directors and provides (i) for the granting of non-qualified stock options, (ii) that the maximum term for options granted under the plan is 10 years and (iii) that the exercise price for the options may not be less than 100% of the fair market value of our common stock on the date of grant. |
30
| |
Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The following table, together with the accompanying footnotes, sets forth information, as of March 21, 2008, regarding stock ownership of all persons known by us to own beneficially 5% or more of our outstanding common stock, all directors, named executive officers and all directors and executive officers as a group.
We determined beneficial ownership in accordance with rules promulgated by the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Except as otherwise indicated, we believe that the persons or entities named in the following table have sole voting and investment power with respect to all shares of common stock as beneficially owned by them, subject to community property laws where applicable. All information with respect to beneficial ownership has been furnished to us by the respective stockholder.
| | | | | | | | | | | |
Name of
Beneficial Owner (1) | | Shares of Common Stock
Beneficially Owned | | Percentage
Of Ownership | |
| |
| |
| |
|
(i) Directors and Executive Officers | | | | | | | �� | | |
Harry Wachtel | | | | 6,762,000 | (2) | | | | 20.6 | % | |
Thomas C. Robertson | | | | 555,000 | (3) | | | | 1.7 | % | |
Peter C. Einselen | | | | 685,000 | (4) | | | | 2.1 | % | |
Mark Weiss | | | | 1,052,000 | (6) | | | | 3.3 | % | |
William I. Wunderlich | | | | 1,622,000 | (5)(7) | | | | 4.8 | % | |
| | | | | | | | | | | |
All executive officers and directors as a group
(6 persons) | | | | 9,467,000 | (8) | | | | 26.9 | % | |
| | | | | | | | | | | |
(ii) 5% Stockholders | | | | | | | | | | | |
James T. Martin | | | | 6,270,000 | | | | | 19.2 | % | |
Kinderhook Partners, LP | | | | 6,038,000 | | | | | 18.5 | % | |
Wasatch Advisors, Inc | | | | 3,229,000 | | | | | 9.9 | % | |
Morehead Opportunity Fund, LP | | | | 2,191,000 | | | | | 6.7 | % | |
| |
(1) | Unless otherwise indicated below, each director, executive officer and each 5% stockholder has sole voting and investment power with respect to all shares beneficially owned. The address for Mr. Wachtel, Mr. Weiss and Mr. Wunderlich is c/o AutoInfo, Inc., 6413 Congress Avenue, Suite 260, Boca Raton, FL 33487. The address for Mr. Martin is c/o Bermuda Trust Company, Compass Point Road, 9 Bermudian Road, Hamilton HM11, Bermuda. The address for Kinderhook Partners, LP is One Executive Drive, Suite 160, Fort Lee, NJ 07024. |
| |
(2) | Includes 1,259,000 shares with respect to which Mr. Wachtel has been granted voting rights pursuant to voting proxy agreements and 500,000 shares issuable upon the exercise of stock options. |
| |
(3) | Includes 455,000 shares issuable upon the exercise of stock options. |
| |
(4) | Includes 385,000 shares issuable upon the exercise of stock options |
| |
(5) | Includes 800,000 shares issuable upon the exercise of stock options. |
| |
(6) | Includes 852,000 with respect to which Mr. Weiss has granted voting rights to Mr. Wachtel pursuant to a voting proxy agreement. Mr. Weiss retains full control over the disposition of these shares. |
| |
(7) | Includes 407,000 with respect to which Mr. Wunderlich has granted voting rights to Mr. Wachtel pursuant to a voting proxy agreement. Mr. Wunderlich retains full control over the disposition of these shares. |
| |
(8) | Assumes that all currently exercisable options or warrants owned by members of this group have been exercised. |
31
| |
Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Certain relationships and related transactions
None.
Director Independence
The Board has determined that Thomas Robertson and Peter Einselen (the “Independent Directors”) are independent as that term is defined in the listing standards of the Nasdaq. As disclosed above, Messrs. Robertson and Einselen are the sole members of our audit committee and our compensation committee and are independent for such purposes.
In determining director independence, the Board considered the option awards to the Independent Directors for the year ended December 31, 2007, disclosed in “Item 11 – Executive Compensation – Director Compensation” above, and determined that such awards were compensation for services rendered to the Board and therefore did not impact their ability to continue to serve as Independent Directors.
| |
Item 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The aggregate fees billed by our principal accounting firm, Dworken, Hillman, LaMorte & Sterczala, P.C., for the fiscal years ended December 31, 2007 and 2006 are as follows:
| | | | | | | | | | | |
| | 2007 | | 2006 | |
| |
| |
| |
Audit fees | | | $ | 66,000 | | | | $ | 61,000 | | |
Audit related fees | | | | — | | | | | — | | |
Tax fees | | | | — | | | | | — | | |
All other fees | | | | — | | | | | — | | |
| | |
|
| | | |
|
| | |
Total fees | | | $ | 66,000 | | | | $ | 61,000 | | |
| | |
|
| | | |
|
| | |
Audit Committee Pre-Approval Policies and Procedures
Our audit committee charter provides that the audit committee will pre-approve audit services and non-audit services to be provided by our independent auditor before the auditor is engaged to render these services. The audit committee may consult with management in the decision-making process, but may not delegate this authority to management. The audit committee may delegate its authority to pre-approve services to one or more committee members, provided that the designees present the pre-approvals to the full committee at the next committee meeting.
PART IV
| |
Item 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
| | | |
(a) The following documents are filed as part of this report: |
| (1) Financial Statements – See the Index to the consolidated financial statements on page F-1 |
(b) Exhibits |
| |
No. 3A | Certificate of Incorporation of the Company, as amended. (9) |
32
| |
No. 3B | Amended and Restated By-Laws of the Company. (5) |
| |
No. 4A | Specimen Stock Certificate. (2) |
| |
No. 10A | **1986 Stock Option Plan. (1) |
| |
No. 10B | **1989 Stock Option Plan. (3) |
| |
No. 10C | **1992 Stock Option Plan. (4) |
| |
No. 10D | **1997 Stock Option Plan. (6) |
| |
No. 10E | **1997 Non-Employee Stock Option Plan. (6) |
| |
No. 10F | **1999 Stock Option Plan. (8) |
| |
No. 10G | Form of Agreement and Plan of Reorganization among AutoInfo, Inc. on the one hand, and Sunteck Transport Co., Inc., et al., on the other hand, dated June 22, 2000. (7) |
| |
No. 10H | Form of Debenture dated December 6, 2000. (7) |
| |
No. 10I | **Employment Agreement between AutoInfo, Inc. and Harry M. Wachtel dated as of January 1, 2007. (13) |
| |
No. 10J | **Employment Agreement between AutoInfo, Inc. and William I. Wunderlich dated January 1, 2007. (13) |
| |
No. 10M | Stock Purchase Agreement between AutoInfo, Inc and Kinderhook Partners, LP dated January 21, 2005. (10) |
| |
No. 10N | Registration Rights Agreement between AutoInfo, Inc. and Kinderhook Partners, LP, et al, dated October 4, 2005. (10) |
| |
No. 10O | Registration Rights Agreement between AutoInfo, Inc. and Kinderhook Partners, LP, et al, dated January 5, 2005. (11) |
| |
No. 10P | First Amendment to Revolving Credit and Security Agreement between Wachovia Bank and AutoInfo, Inc., et al. (10) |
| |
No. 10Q | Second Amendment to Revolving Credit and Security Agreement between Wachovia Bank and AutoInfo, Inc., et al. (11) |
| |
No. 10R | Third Amendment to Revolving Credit and Security Agreement between Wachovia Bank and AutoInfo, Inc., et al. (13) |
| |
No. 10S | **2003 Stock Option Plan. (12) |
| |
No. 10T | **2005 Independent Sales Agent Stock Option Plan. (13) |
| |
No. 10U | **2006 Stock Option Plan. (13) |
33
| |
No. 10V | **2006 Independent Sales Agent Stock Option Plan. (13) |
| |
No. 10W | Fourth Amendment to Revolving Credit and Security Agreement between Wachovia Bank and AutoInfo, Inc., et al. * |
| |
No. 10X | Fifth Amendment to Revolving Credit and Security Agreement between Wachovia Bank and AutoInfo, Inc., et al. * |
| |
No. 10Y | Sixth Amendment to Revolving Credit and Security Agreement between Wachovia Bank and AutoInfo, Inc., et al. * |
| |
No. 10Z | **Employment Agreement between AutoInfo, Inc. and Michael. P. Williams dated as of January 1, 2007. * |
| |
No. 14A | Code of Ethics. (10) |
| |
No. 21A | Subsidiaries of the Registrant. (10) |
| |
No. 23A | Consent of Dworken, Hillman, LaMorte & Sterczala, P.C., independent registered public accounting firm.* |
| |
No. 31A | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
| |
No. 31B | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
| |
No. 32A | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
| |
No. 32B | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
|
|
*Filed as an exhibit hereto.
**Management contract or compensatory plan or arrangement. |
| |
(1) | This Exhibit was filed as an Exhibit to our definitive proxy statement dated October 20, 1986 and is incorporated herein by reference. |
| |
(2) | This Exhibit was filed as Exhibit to our Registration Statement on Form S-1 (File No. 33-15465) and is incorporated herein by reference. |
| |
(3) | This Exhibit was filed as an Exhibit to our definitive proxy statement dated September 25, 1989 and is incorporated herein by reference. |
| |
(4) | This Exhibit was filed as an Exhibit our definitive proxy statement dated October 2, 1992 and is incorporated herein by reference. |
| |
(5) | This Exhibit was filed as an Exhibit to our Current Report on Form 8-K dated March 30, 1995 and is incorporated herein by reference. |
| |
(6) | This Exhibit was filed as an Exhibit to our Annual Report on Form 10-K for the year ended December 31, 1997 and is incorporated herein by reference. |
| |
(7) | This Exhibit was filed as an Exhibit to our Current Report on Form 8-K dated December 6, 2000 and is incorporated herein by reference. |
34
| |
(8) | This Exhibit was filed as an Exhibit to our Annual Report on Form 10-K for the year ended December 31, 1999 and is incorporated herein by reference. |
| |
(9) | This Exhibit was filed as an Exhibit to our Annual Report on Form 10-KSB for the year ended December 31, 2000 and is incorporated herein by reference. |
| |
(10) | This Exhibit was filed as an Exhibit to our Annual Report on Form 10-KSB for the year ended December 31, 2004 and is incorporated herein by reference. |
| |
(11) | This Exhibit was filed as an Exhibit to our Annual Report on Form 10-K for the year ended December 31, 2005 and is incorporated herein by reference. |
| |
(12) | This Exhibit was filed with our Definitive Information Statement on Schedule 14C, filed on July 7, 2003 and is incorporated herein by reference. |
| |
(13) | This Exhibit was filed as an Exhibit to our Annual Report on Form 10-K for the year ended December 31, 2006 and is incorporated herein by reference. |
(c) Information required by schedules called for under Regulation S-X is either not applicable or is included in the consolidated financial statements or notes thereto.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d), the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on March 25, 2008 on its behalf by the undersigned, thereunto duly authorized.
| | |
| AutoInfo, Inc. |
| | |
| By: | /s/ Harry M. Wachtel |
| |
|
| | Harry M. Wachtel, President and Chief |
| | Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.
| | | | |
/s/ Harry M. Wachtel | | | | |
| | | | |
Harry M. Wachtel | | President, Chief Executive Officer and | | March 25, 2008 |
| | Chairman of the Board | | |
| | (Principal Executive Officer) | | |
| | | | |
/s/ William I. Wunderlich | | | | |
| | | | |
William I. Wunderlich | | Chief Financial Officer | | March 25, 2008 |
| | (Principal Accounting Officer) | | |
| | | | |
/s/ Mark Weiss | | | | |
| | | | |
Mark Weiss | | Director | | March 25, 2008 |
| | | | |
/s/ Peter C. Einselen | | | | |
| | | | |
Peter C. Einselen | | Director | | March 25, 2008 |
| | | | |
/s/ Thomas C. Robertson | | | | |
| | | | |
Thomas C. Robertson | | Director | | March 25, 2008 |
36
AUTOINFO, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Information required by schedules called for under Regulation S-X is either not applicable or is included in the Consolidated Financial Statements or Notes thereto.
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
AutoInfo, Inc.
We have audited the accompanying consolidated balance sheets of AutoInfo, Inc. and Subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AutoInfo, Inc. and Subsidiaries as of December 31, 2007 and 2006 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America.
As described in Note 2 to the consolidated financial statements, in 2006 the Company adopted Statement of Financial Accounting Standards No. 123R, “Share-Based Payment.”
March 26, 2008
Shelton, Connecticut
| | |
| | /s/ Dworken, Hillman, LaMorte & Sterczala, P.C. |
| |
|
| Dworken, Hillman, LaMorte & Sterczala, P.C. |
F-2
AUTOINFO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | | | | |
| | December 31, | |
| |
| |
| | 2007 | | 2006 | |
| |
| |
| |
ASSETS (Note 4) | | | | | | | |
| | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | | $ | 270,000 | | $ | 146,000 | |
Accounts receivable, net of allowance for doubtful accounts of $326,000 and $249,000 as of December 31, 2007 and 2006, respectively | | | 24,224,000 | | | 16,967,000 | |
Deferred income taxes (Note 5) | | | 1,000,000 | | | 1,445,000 | |
Prepaid expenses | | | 310,000 | | | 194,000 | |
Current portion of advances and other assets (Note 3) | | | 1,273,000 | | | 565,000 | |
| |
|
| |
|
| |
| | | | | | | |
Total current assets | | | 27,077,000 | | | 19,317,000 | |
| | | | | | | |
Fixed assets, net of depreciation | | | 477,000 | | | 324,000 | |
| | | | | | | |
Deferred income taxes (Note 5) | | | 2,037,000 | | | 2,502,000 | |
| | | | | | | |
Advances and other assets, net of current portion (Note 3) | | | 3,599,000 | | | 1,679,000 | |
| |
|
| |
|
| |
| | | | | | | |
| | $ | 33,190,000 | | $ | 23,822,000 | |
| |
|
| |
|
| |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | |
| | | | | | | |
Current liabilities: | | | | | | | |
Loan payable (Note 4) | | $ | — | | $ | 3,451,000 | |
Accounts payable and accrued liabilities | | | 10,584,000 | | | 8,375,000 | |
| |
|
| |
|
| |
| | | | | | | |
Total current liabilities | | | 10,584,000 | | | 11,826,000 | |
| |
|
| |
|
| |
| | | | | | | |
Loan payable (Note 4) | | | 8,790,000 | | | | |
Commitments and contingencies (Note 6) | | | | | | | |
| | | | | | | |
Stockholders’ equity: (Note 7) | | | | | | | |
Common stock - authorized 100,000,000 shares, $.001 par value; issued and outstanding 32,586,000 and 32,102,000 as of December 31, 2007 and 2006, respectively | | | 33,000 | | | 32,000 | |
Additional paid-in capital | | | 19,635,000 | | | 19,420,000 | |
Deficit | | | (5,852,000 | ) | | (7,456,000 | ) |
| |
|
| |
|
| |
| | | | | | | |
Total stockholders’ equity | | | 13,816,000 | | | 11,996,000 | |
| |
|
| |
|
| |
| | | | | | | |
| | $ | 33,190,000 | | $ | 23,822,000 | |
| |
|
| |
|
| |
The accompanying notes are an integral part of these consolidated financial statements.
F-3
AUTOINFO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
| | | | | | | | | | |
| | For The Years Ended December 31, | |
| |
| |
| | 2007 | | 2006 | | 2005 | |
| |
| |
| |
| |
|
Gross revenues | | $ | 110,332,000 | | $ | 84,111,000 | | $ | 68,040,000 | |
Cost of transportation | | | 89,023,000 | | | 66,368,000 | | | 54,486,000 | |
| |
|
| |
|
| |
|
| |
|
Net revenues | | | 21,309,000 | | | 17,743,000 | | | 13,554,000 | |
| |
|
| |
|
| |
|
| |
|
Commissions | | | 13,492,000 | | | 11,044,000 | | | 8,348,000 | |
Operating expenses | | | 4,870,000 | | | 3,840,000 | | | 3,005,000 | |
| |
|
| |
|
| |
|
| |
| | | 18,362,000 | | | 14,884,000 | | | 11,353,000 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Income from operations | | | 2,947,000 | | | 2,859,000 | | | 2,201,000 | |
| | | | | | | | | | |
Interest expense | | | 277,000 | | | 113,000 | | | 56,000 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Income before income taxes (benefit) | | | 2,670,000 | | | 2,746,000 | | | 2,145,000 | |
Income taxes (benefit) (Note 5) | | | 1,066,000 | | | (882,000 | ) | | (1,463,000 | ) |
| |
|
| |
|
| |
|
| |
|
Net income | | $ | 1,604,000 | | $ | 3,628,000 | | $ | 3,608,000 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Net income per share: | | | | | | | | | | |
Basic | | $ | .05 | | $ | .11 | | $ | .11 | |
Diluted | | $ | .05 | | $ | .10 | | $ | .11 | |
| | | | | | | | | | |
Weighted average number of common shares: | | | | | | | | | | |
Basic | | | 32,447,000 | | | 31,915,000 | | | 31,520,000 | |
Diluted | | | 35,560,000 | | | 36,005,000 | | | 33,920,000 | |
The accompanying notes are an integral part of these consolidated financial statements.
F-4
AUTOINFO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | |
| | Shares of
Common
Stock
Outstanding | | Common
Stock | | Additional
Paid - In
Capital | | Deficit | |
| |
| |
| |
| |
| |
|
Balance, January 1, 2005 | | | 31,218,000 | | $ | 31,000 | | $ | 19,073,000 | | $ | (14,692,000 | ) |
| | | | | | | | | | | | | |
Exercise of stock options | | | 406,000 | | | 1,000 | | | 21,000 | | | | |
| | | | | | | | | | | | | |
Stock-based compensation expense | | | | | | | | | 89,000 | | | | |
| | | | | | | | | | | | | |
Net income | | | | | | | | | | | | 3,608,000 | |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Balance, December 31, 2005 | | | 31,624,000 | | $ | 32,000 | | $ | 19,183,000 | | $ | (11,084,000 | ) |
| | | | | | | | | | | | | |
Exercise of stock options | | | 478,000 | | | | | | 103,000 | | | | |
| | | | | | | | | | | | | |
Stock-based compensation expense | | | | | | | | | 134,000 | | | | |
| | | | | | | | | | | | | |
Net income | | | | | | | | | | | | 3,628,000 | |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Balance, December 31, 2006 | | | 32,102,000 | | $ | 32,000 | | $ | 19,420,000 | | $ | (7,456,000 | ) |
| | | | | | | | | | | | | |
Exercise of stock options | | | 484,000 | | | 1,000 | | | 52,000 | | | | |
| | | | | | | | | | | | | |
Stock-based compensation expense | | | | | | | | | 163,000 | | | | |
| | | | | | | | | | | | | |
Net income | | | | | | | | | | | | 1,604,000 | |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Balance, December 31, 2007 | | | 32,586,000 | | $ | 33,000 | | $ | 19,635,000 | | $ | (5,852,000 | ) |
| |
|
| |
|
| |
|
| |
|
| |
The accompanying notes are an integral part of these consolidated financial statements.
F-5
AUTOINFO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | |
| | For The Years Ended December 31, | |
| | 2007 | | 2006 | | 2005 | |
| |
| |
| |
| |
Cash flows from operating activities: | | | | | | | | | | |
Net income | | $ | 1,604,000 | | $ | 3,628,000 | | $ | 3,608,000 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | | | | |
Change in allowance for doubtful accounts | | | 77,000 | | | 48,000 | | | 76,000 | |
Depreciation and amortization expenses | | | 142,000 | | | 104,000 | | | 85,000 | |
Stock-based compensation expense | | | 163,000 | | | 134,000 | | | 89,000 | |
Deferred income taxes | | | 910,000 | | | (1,040,000 | ) | | (1,586,000 | ) |
| | | | | | | | | | |
Changes in assets and liabilities: | | | | | | | | | | |
Accounts receivable | | | (7,335,000 | ) | | (4,279,000 | ) | | (3,153,000 | ) |
Prepaid expenses | | | (116,000 | ) | | (108,000 | ) | | 424,000 | |
Advances and other assets | | | (2,628,000 | ) | | (2,037,000 | ) | | (8,000 | ) |
Accounts payable and accrued liabilities | | | 2,209,000 | | | 1,140,000 | | | 1,850,000 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Net cash provided by (used in) operating activities | | | (4,974,000 | ) | | (2,410,000 | ) | | 1,385,000 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | |
Capital expenditures | | | (294,000 | ) | | (137,000 | ) | | (307,000 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Net cash used in investing activities | | | (294,000 | ) | | (137,000 | ) | | (307,000 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | |
Exercise of stock options | | | 53,000 | | | 103,000 | | | 21,000 | |
Increase (decrease) in loan payable, net | | | 5,339,000 | | | 2,171,000 | | | (718,000 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Net cash provided by (used in) financing activities | | | 5,392,000 | | | 2,274,000 | | | (697,000 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Net change in cash and cash equivalents | | | 124,000 | | | (273,000 | ) | | 381,000 | |
Cash and cash equivalents, beginning of year | | | 146,000 | | | 419,000 | | | 38,000 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Cash and cash equivalents, end of year | | $ | 270,000 | | $ | 146,000 | | $ | 419,000 | |
| |
|
| |
|
| |
|
| |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
AUTOINFO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 and 2005
Note 1 - Business and Summary of Significant Accounting Policies
Business Overview
Through its wholly-owned subsidiary, Sunteck Transport Co., Inc, the Company is a non-asset based transportation services company, providing transportation capacity and related transportation services to shippers throughout the United States, and to a lesser extent, Canada. As a non-asset based provider of brokerage and contract carrier transportation services, the Company does not own any equipment and its services are provided through strategic alliances with less than truckload, truckload, air, rail, ocean common carriers and independent owner-operators to service customers’ needs. The Company’s non-asset based services include ground transportation coast to coast, local pick up and delivery. The Company’s business services emphasize safety, information coordination and customer service and are delivered through a network of independent commissioned sales agents and third party capacity providers coordinated by it. The independent commissioned sales agents typically enter into exclusive contractual arrangements with the Company and are responsible for locating freight and coordinating the transportation of the freight with customers and capacity providers. The third party capacity providers consist of independent contractors who provide truck capacity to the Company, including owner-operators who operate under the Company’s contract carrier license, air cargo carriers and railroads.
The Company’s brokerage services are provided though a network of independent sales agents throughout the United States and Canada. The Company’s services include arranging for the transport of customers’ freight from the shippers location to the designated destination. The Company does not own any trucking equipment and relies on independent carriers for the movement of customers’ freight. The Company seeks to establish long-term relationships with its customers and provides a variety of logistics services and solutions to eliminate inefficiencies in its customers’ supply chain management.
The Company’s contract carrier services are also provided through a network of independent sales agents and independent owner-operators throughout the United States. The Company does not own any trucking equipment; its independent owner-operators lease onto the Company’s operating authority and transport freight under its name. In the fourth quarter of 2006, the Company upgraded its driver safety and compliance standards under the direction of a new safety director as part of its effort to improve safety ratings and the quality of its owner operator network. These changes resulted in a short-term reduction in the number of owner operators and corresponding number of transactions in the fourth quarter of 2006 and the first and second quarters of 2007, but did not have any adverse long-term effect.
Summary of Significant Accounting Policies
Basis of Presentation
The financial statements of the Company have been prepared using the accrual basis of accounting under accounting principles generally accepted in the United States of America (GAAP).
F-7
Principles of Consolidation
The consolidated financial statements include the accounts of the AutoInfo, Inc. (the Company), its wholly-owned subsidiary Sunteck Transport Co., Inc. and its wholly-owned subsidiaries Sunteck Transport Carriers, Inc., and Eleets Logistics, Inc. (collectively, Sunteck). All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of these financial statements in conformity with GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities and contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. The Company believes that all such assumptions are reasonable and that all estimates are adequate, however, actual results could differ from those estimates.
Revenue Recognition
As a third party transportation logistics provider, the Company acts as the shippers’ agent and arranges for a carrier to handle the freight. Gross revenues consist of the total dollar value of services purchased by shippers. Revenue is recognized upon the delivery of freight, at which time the related transportation cost, including commission, is also recognized. At that time, the Company’s obligations are completed and collection of receivables is reasonably assured.
Emerging Issues Task Force No. 99-19, “Reporting Revenues Gross as a Principal Versus Net as an Agent” (EITF 99-19), establishes criteria for recognizing revenues on a gross or net basis. The Company is the primary obligor in its transactions, has all credit risk, maintains substantially all risk and rewards, has discretion in selecting the supplier, and has latitude in pricing decisions. Accordingly, the Company records all transactions at the gross amount, consistent with the provisions of EITF 99-19.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in banks.
Provision For Doubtful Accounts
The Company continuously monitors the creditworthiness of its customers and has established an allowance for amounts that may become uncollectible in the future based on current economic trends, its historical payment and bad debt write-off experience, and any specific customer related collection issues.
Fixed Assets
Fixed assets as of December 31, 2007 and 2006, consisting predominantly of furniture, fixtures equipment and proprietary software, were carried at cost net of accumulated depreciation. Depreciation of fixed assets was provided on the straight-line method over the estimated useful lives of the related assets which range from three to five years.
F-8
Income Per Share
Basic income per share is based on net income divided by the weighted average number of common shares outstanding. Common stock equivalents outstanding were 3,113,000, 4,090,000 and 2,400,000 for the years ended December 31, 2007, 2006 and 2005, respectively.
Income Taxes
The Company utilizes the asset and liability method for accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and future benefits to be recognized upon the utilization of certain operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Recently Issued Accounting Standards
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (FIN 48), which clarifies the accounting for uncertainty in tax positions. FIN 48 requires the recognition of a tax position when it is more likely than not that the tax position will be sustained upon examination by taxing authorities, based upon the technical merits of the position. We adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 did not have a material impact on our financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements” (SFAS 157), which provides guidance for using fair value to measure assets and liabilities. SFAS 157 defines fair value and establishes a framework for measuring fair value; however, SFAS 157 does not expand the use of fair value in any new circumstances. The provisions of SFAS 157 are effective for us as of January 1, 2008. We do not expect the adoption of SFAS 157 to have a material impact on our financial statements.
In February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159), which permits entities to choose to measure many financial assets and liabilities at fair value. The fair value option may be applied, subject to certain exceptions, on an instrument by instrument basis; is irrevocable; and is applied only to entire instruments and not to portions of instruments. The provisions of SFAS 159 are effective for us as of January 1, 2008. We do not expect the adoption of SFAS 159 to have a material impact on our financial statements.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (SFAS 141(R)), which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The Statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for us as of January 1, 2009. The provisions of SFAS 141(R) will impact us only if we are party to a business combination after SFAS 141(R) has been adopted.
F-9
Segment Information
The Company provides transportation capacity and related logistics services through its integrated network of independent agents and third party capacity providers. For the purpose of applying Statement of Financial Accounting Standards No. 131, “Disclosures About Segments of an Enterprise and Related Information”, management has determined that it operates in a single business segment.
Reclassification
Certain prior year balances have been reclassified to conform with the current year presentation. These reclassifications had no effect on previously reported results of operations or net assets.
Note 2 - Change in Accounting Principle
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (SFAS 123R). The pronouncement requires companies to measure and recognize compensation expense for all share-based payments to employees in the financial statements based on the fair value at the date of the grant. In the first quarter of 2006, the Company adopted SFAS 123R using the modified prospective method. Under the modified prospective method, compensation cost is recognized for all share-based payments granted after the adoption of SFAS 123R and for all awards granted to employees prior to the adoption date of SFAS 123R that were unvested on the adoption date. Accordingly, no restatements were made to prior periods.
Prior to the adoption of SFAS 123R, the Company applied SFAS 123 to account for its stock option plans. As permitted by SFAS 123, the Company had chosen to apply Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” in accounting for its employee stock compensation plans. Accordingly, no compensation expense was recognized for its employee stock option issuances, as stock options are issued with an exercise price at least equal to the closing price at the date of grant.
Note 3 – Advances and Other Assets
Advances and other assets consists of the following:
| | | | | | | |
| | December 31, | |
| | 2007 | | 2006 | |
| |
| |
| |
Signing bonuses to independent sales agents, amortized on a straight-line basis over the life of the underlying contracts from three to five years | | $ | 2,184,000 | | $ | 368,000 | |
Non-interest bearing advances to independent sales agents repayable at the end of the underlying contracts at various dates from 2008 through 2012 | | | 942,000 | | | 725,000 | |
Loans to independent sales agents bearing interest at prime to prime plus 1% payable in 2012 | | | 738,000 | | | 575,000 | |
Due from independent sales agents and employees consisting primarily of short-term non-interest bearing loans and advanced commissions expected to be earned / repaid in the next twelve months. | | | 1,008,000 | | | 576,000 | |
| |
|
| |
|
| |
| | | | | | | |
| | | 4,872,000 | | | 2,244,000 | |
Less: current portion | | | 1,273,000 | | | 565,000 | |
| |
|
| |
|
| |
| | | | | | | |
| | | 3,599,000 | | | 1,679,000 | |
| |
|
| |
|
| |
F-10
Advances and other assets are expected to be earned / repaid as follows:
| | | | |
2008 | | $ | 1,273,000 | |
2009 | | | 454,000 | |
2010 | | | 647,000 | |
2011 | | | 1,416,000 | |
2012 | | | 967,000 | |
Thereafter | | | 115,000 | |
| |
|
| |
| | $ | 4,872,000 | |
| |
|
| |
Note 4 – Debt
Loan Payable
In May 2003, the Company entered into a $1.5 million Line of Credit with a commercial lending institution, secured by substantially all assets of the Company. In 2004, this Line of Credit was increased to $2.5 million, in 2006 this line was increased to $4.0 million and in 2007 this line was increased to $10.5 million. The Line of Credit expires in June 2009. The Line of Credit provides for interest at the LIBOR plus 1 1/4% (5.85% at December 31, 2007) and the maintenance of certain financial covenants.
Note 5- Income Taxes
For the years ended December 31, 2007, 2006 and 2005, the provision for income taxes consisted of the following:
| | | | | | | | | | | | | | | | | | | |
| | 2007 | | 2006 | | 2005 | |
| | Current | | Deferred | | Current | | Deferred | | Current | | Deferred | |
| |
|
|
|
|
|
|
|
|
|
|
| |
| | | | | | | | | | | | | | | | | | | |
Income tax expense before application of operating loss carryforwards | | $ | 1,066,000 | | $ | — | | $ | 1,083,000 | | $ | — | | $ | 841,000 | | $ | — | |
Income tax expense (benefit) of operating loss carryforwards | | | (910,000 | ) | | 910,000 | | | (925,000 | ) | | 925,000 | | | (718,000 | ) | | 718,000 | |
Change in valuation allowance | | | | | | — | | | | | | (1,965,000 | ) | | | | | (2,304,000 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | | | | |
Income tax expense (benefit) | | $ | 156,000 | | $ | 910,000 | | $ | 158,000 | | $ | (1,040,000 | ) | $ | 123,000 | | $ | (1,586,000 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
F-11
The following table reconciles the Company’s effective income tax rate on income from operations to the Federal Statutory Rate for the years ended December 31, 2007, 2006 and 2005:
| | | | | | | | | | |
| | 2007 | | 2006 | | 2005 | |
| |
| |
| |
| |
Federal Statutory Rate | | | 34.0 | % | | 34.0 | % | | 34.0 | % |
| | | | | | | | | | |
State income taxes, net of federal benefit | | | 5.9 | | | 5.8 | | | 3.4 | |
| | | | | | | | | | |
Effect of: | | | | | | | | | | |
Utilization of operating loss carryforward | | | | | | (34.0 | ) | | (34.0 | ) |
Change in valuation allowance | | | | | | (37.9 | ) | | (44.0 | ) |
| |
|
| |
|
| |
|
| |
| | | 39.9 | % | | (32.1 | )% | | (40.6 | )% |
| |
|
| |
|
| |
|
| |
Deferred taxes are comprised of the following at December 31, 2007 and 2006:
| | | | | | | | |
| | | December 31,
2007 | | December 31,
2006 | |
| | |
| |
| |
| Deferred tax asset: | | | | | | | |
| Net operating loss carryforward | | $ | 3,037,000 | | $ | 3,947,000 | |
| | |
|
| |
|
| |
The deferred tax asset represents expected future tax savings resulting from the Company’s net operating loss carryforward. As of December 31, 2007, the Company has a net operating loss carryforward of approximately $8.9 million for federal income tax purposes which expire through 2014. Utilization of this benefit is primarily subject to the extent of future earning of the Company, and may be limited by, among other things, stockholder changes, including the possible issuance by the Company of additional shares in one or more financing or acquisition transactions.
Based upon available objective evidence, including the Company’s post-merger history of profitability, management believes it is more likely than not that forecasted taxable income will be sufficient to utilize all of the net operating loss carryforward before its expiration in 2014.
Note 6 - Commitments and Contingencies
Leases
The Company is obligated under non-cancelable operating leases for premises expiring at various dates through April 2010. Future minimum lease payments are $65,000, $70,000 and $24,000 for the years ending December 31, 2008, 2009 and 2010, respectively. Rent expense for the years ended December 31, 2007, 2006 and 2005 was $124,000, $105,000 and $97,000, respectively.
Other Agreements
The Company has employment agreements with Messrs. Wachtel and Wunderlich, its chief executive officer and chief financial officer, respectively, who are also stockholders. The agreements expire in December 31, 2011 and provide for minimum annual compensation of $250,000 and $175,000,
F-12
and bonuses equal to 10% of the Company’s consolidated pre-tax profit (as defined) up to $1,250,000 and, 5% of our consolidated pre-tax profit in excess of $1,250,000, respectively. Bonus payments to each of Messrs. Wachtel and Wunderlich were $227,000 for the year ended December 31, 2007, $269,000 and $229,000 for the year ended December 31, 2006, respectively, and $125,000 for the year ended December 31, 2005.
Litigation
The Company is involved in certain litigation arising in the ordinary course of its business. In the opinion of management, these matters will not have a material adverse effect on the Company’s financial position or liquidity.
Note 7 - Stockholders’ Equity
Stock Option Plans
The Company has ten stock option plans; its 1985, 1986, 1989, 1992, 1997, 1999, 2003, 2005 and two 2006 Plans (collectively, the Plans). Pursuant to the Plans, a total of 20,342,500 shares of common stock were made available for grant of stock options. Under the Plans, options have been granted to key personnel to purchase shares at not less than fair market value on the date of grant. Stock options generally vest ratably over a period of three to five years from the date of grant and must be exercised within ten years from the date of grant. The Company’s policy is to recognize compensation expense on a straight-line basis over the requisite service period for the entire award. Compensation expense is recognized only for those options expected to vest, with forfeitures estimated at the date of grant based on the Company’s historical experience and future expectations. No further grants will be made under the 1985, 1986, 1989 or 1992 Plans.
Options have been granted under the Plans to independent sales agents under the same general terms and conditions as options granted to employees. Such option grants are primarily based upon profits generated and act as long-term incentives to remain with the Company. Out of the total options outstanding of 12,811,000 as of December 31, 2007, 9,716,000 have been granted to independent sales agents.
Option activity for the years ended December 31, 2007, 2006 and 2005 was as follows:
| | | | | | | | | | | | | |
| | Shares
Subject to
Options | | Weighted
Average
Exercise Price Per Share | | Weighted
Average
Remaining
Contractual
Life | | Aggregate
Intrinsic
Value
(in millions) | |
| |
| |
| |
| |
| |
|
Outstanding, January 1, 2005 | | | 5,594,000 | | $ | .28 | | | 5.9 | | $ | 1.8 | |
| | | | | | | |
|
| |
|
| |
Forfeited | | | (611,000 | ) | | .33 | | | | | | | |
Exercised | | | (406,000 | ) | | .13 | | | | | | | |
Granted | | | 2,504,000 | | | .54 | | | | | | | |
| |
|
| |
|
| | | | | | | |
Outstanding, December 31, 2005 | | | 7,081,000 | | $ | .37 | | | 5.1 | | $ | 1.5 | |
| | | | | | | |
|
| |
|
| |
Forfeited | | | (192,000 | ) | | .56 | | | | | | | |
Exercised | | | (478,000 | ) | | .22 | | | | | | | |
Granted | | | 4,881,000 | | | 1.11 | | | | | | | |
| |
|
| |
|
| | | | | | | |
Outstanding, December 31, 2006 | | | 11,292,000 | | $ | .70 | | | 4.6 | | $ | 3.7 | |
| | | | | | | |
|
| |
|
| |
Forfeited | | | (3,985,000 | ) | | .96 | | | | | | | |
Exercised | | | (485,000 | ) | | .11 | | | | | | | |
Granted | | | 5,989,000 | | | .87 | | | | | | | |
| |
|
| |
|
| | | | | | | |
| |
|
| |
|
| | | | | | | |
Outstanding December 31, 2007 | | | 12,811,000 | | $ | .72 | | | 4.1 | | $ | — | |
| |
|
| |
|
| |
|
| |
|
| |
Exercisable, December 31, 2007 | | | 4,491,000 | | $ | .46 | | | 3.1 | | $ | 1.0 | |
| |
|
| |
|
| |
|
| |
|
| |
F-13
As of December 31, 2007, there were 4,476,000 shares of common stock available for issuance pursuant to future stock option grants. Additional information regarding options outstanding as of December 31, 2007 is as follows:
| | | | | | | | | | | | | | | | | |
| | | Options outstanding | | Options exercisable | |
| | |
| |
| |
Range of
exercise prices | | Shares | | Weighted
average
remaining
contractual life
(years) | | Weighted
average exercise
price | | Shares | | Weighted
average exercise price | |
| |
| |
| |
| |
| |
| |
$ | .05 - .20 | | | 1,320,000 | | | | 3.8 | | | $ | .13 | | | 1,319,000 | | $ | .13 | |
| .24 - .65 | | | 3,720,000 | | | | 2.7 | | | | .49 | | | 2,565,000 | | | .47 | |
| .72 - .88 | | | 4,764,000 | | | | 5.6 | | | | .77 | | | 127,000 | | | .87 | |
| 1.00 – 1.48 | | | 3,007,000 | | | | 3.8 | | | | 1.18 | | | 479,000 | | | 1.22 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ | .05 – 1.48 | | | 12,811,000 | | | | 4.1 | | | $ | .72 | | | 4,491,000 | | $ | .46 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant-date fair value of options granted:
| | | | | | |
| | | | | | |
| 2007 | | $ | .87 | | |
| 2006 | | $ | 1.11 | | |
| 2005 | | $ | 0.54 | | |
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions by grant year.
| | | | | | | | | | |
| | 2007 | | 2006 | | 2005 | |
| |
|
|
|
|
| |
Risk-free interest rate | | | | 5.0 | % | | | | 4.52 | % | | | | 3.00 | % | |
Expected dividend yield | | | | 0 | % | | | | 0 | % | | | | 0 | % | |
Expected volatility factor | | | | 13.61 | % | | | | 18.16 | % | | | | 22.29 | % | |
Expected option term, in years | | | | 6.00 | | | | | 6.00 | | | | | 6.00 | | |
The Company recognized stock-based compensation expense related to stock options of $163,000, $134,000 and $89,000 for the years ended December 31, 2007, 2006 and 2005, respectively. As of December 31, 2007, the Company had $1.2 million of unrecognized stock-based compensation expense related to nonvested stock option plans that will be recognized over a period of five years.
F-14
Note 8 - Fair Value of Financial Instruments
The following disclosures of fair value were determined by management using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities and loan payable are carried at amounts which reasonably approximate fair value.
Note 9 - Quarterly Results of Operations (Unaudited)
| | | | | | | | | | | | | |
| | Year Ended December 31, 2007
Quarter Ended | |
| |
| |
| | Mar 31 | | June 30 | | Sep 30 | | Dec 31 | |
| |
| |
| |
| |
| |
| | | | | | | | | |
Gross revenues | | $ | 22,054,000 | | $ | 26,224,000 | | $ | 29,079,000 | | $ | 32,975,000 | |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
| |
|
| |
|
| |
|
| |
|
| |
Net income | | $ | 326,000 | | $ | 383,000 | | $ | 503,000 | | $ | 392,000 | |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Basic net income per share | | $ | .01 | | $ | .01 | | $ | .02 | | $ | .01 | |
| |
|
| |
|
| |
|
| |
|
| |
Diluted net income per share | | $ | .01 | | $ | .01 | | $ | .01 | | $ | .01 | |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | Year Ended December 31, 2006
Quarter Ended | |
| |
| |
| | Mar 31 | | June 30 | | Sep 30 | | Dec 31 | |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | |
Gross revenues | | $ | 18,096,000 | | $ | 20,858,000 | | $ | 22,442,000 | | $ | 22,715,000 | |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
| |
|
| |
|
| |
|
| |
|
| |
Net income | | $ | 1,155,000 | | $ | 1,044,000 | | $ | 986,000 | | $ | 443,000 | |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Basic net income per share | | $ | .04 | | $ | .03 | | $ | .03 | | $ | .01 | |
| |
|
| |
|
| |
|
| |
|
| |
Diluted net income per share | | $ | .03 | | $ | .03 | | $ | .03 | | $ | .01 | |
| |
|
| |
|
| |
|
| |
|
| |
Note 10 - Supplemental Disclosure of Cash Flow Information and Non-Cash Financing Activities
Cash paid for interest in 2007, 2006 and 2005 was $277,000, $113,000 and $56,000 respectively.
The Company paid income taxes $118,000, $47,000 and $24,000 for the years ended December 31, 2007, 2006 and 2005, respectively.
F-15
Note 11 - Subsequent Event
Subsequent to December 31, 2007, it was brought to management’s attention that a transaction entered into between the Company and Michael Williams, the Company’s chief operating officer and general counsel, may have violated Section 13(k) of the Exchange Act which makes it unlawful for any issuer to “extend or maintain credit in the form of a personal loan to or for any director or executive officer.” The transaction in questions involved a loan from Mr. Williams to two of the Company’s independent sales representatives, the proceeds of which were used by them to exercise outstanding stock options. In turn, the Company made a secured loan to Mr. Williams. After consulting with independent counsel and the audit committee, the Company took appropriate steps to rescind the transaction and restore the parties thereto, including the Company, to thestatus quo ante.The financial statements included in this Report have been adjusted to reflect this rescission. The rescission of the transaction did not have a material impact on the Company’s financial statements.
F-16
