Exhibit 99.1
Transportation Resources, Inc.
Accountants' Report and Consolidated Financial Statements
December 31, 2006
Transportation Resources, Inc.
December 31, 2006
Contents
Independent Accountants' Report.................................1
Consolidated Financial Statements
Balance Sheet.................................................2
Statement of Income...........................................4
Statement of Shareholders' Equity.............................5
Statement of Cash Flows.......................................6
Notes to Financial Statements.................................7
Independent Accountants' Report
Board of Directors
Transportation Resources, Inc.
Joplin, Missouri
We have audited the accompanying consolidated balance sheet of
Transportation Resources, Inc., as of December 31, 2006, and the related
consolidated statements of income, shareholders' equity and cash flows for the
year then ended. 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 audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. 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
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Transportation Resources, Inc., as of December 31, 2006, and the results of
its operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 8, in 2006 the Company changed its method of accounting
for Stock Based Compensation through retrospective application to prior
year's financial statements.
As discussed in Note 9, the Company changed its method of recognizing gains
and losses on the sale of assets in 2006.
/s/ BKD, LLP
Tulsa, Oklahoma
March 2, 2007
1
Transportation Resources, Inc.
Consolidated Balance Sheet
December 31, 2006
Assets
Current Assets
Cash and cash equivalents $ 4,281,431
Short-term investments - U.S. Treasury bills 917,000
Trade receivables, net of allowance for doubtful accounts
of $1,636,018 48,227,963
Other receivables 668,061
Prepaid tires 4,214,328
Other prepaid expenses 7,012,375
Operating supplies, fuel and parts 1,741,544
--------------
Total current assets 67,062,702
--------------
Property and Equipment, at Cost
Land 11,957,223
Structures and land improvements 45,209,954
Revenue equipment 394,730,163
Other operating equipment 9,559,782
Furniture, fixtures and data processing equipment 8,201,926
Construction in progress 113,048
--------------
Total property and equipment 469,772,096
Less accumulated depreciation 196,555,478
--------------
Net property and equipment 273,216,618
--------------
Other Assets 1,050,812
--------------
$ 341,330,132
==============
2
Transportation Resources, Inc.
Consolidated Balance Sheet
December 31, 2006
Liabilities and Shareholders' Equity
Current Liabilities
Outstanding checks in excess of bank balance $ 3,342,083
Line of credit 6,440,000
Current maturities of long-term debt 2,049,311
Accounts payable 7,398,557
Accounts payable-interline 7,444,048
Customer credit balances 3,762,510
Salaries and wages payable 4,761,231
Claims and insurance accruals 11,527,742
Other current and accrued liabilities 6,872,139
--------------
Total current liabilities 53,597,621
--------------
Long-term Obligations
Long-term debt 1,106,642
Claims and insurance accruals 4,906,101
Stock based awards 19,176,140
Other long-term obligations 170,484
--------------
Total long-term obligations 25,359,367
--------------
Shareholders' Equity
Common stock, $0.01 par value; 15,000,000 shares
authorized; 6,033,016 shares issued and outstanding 55,656
Additional paid-in capital 152,764,748
Earnings reinvested in the business 109,505,120
Accumulated other comprehensive income 47,620
--------------
Total shareholders' equity 262,373,144
--------------
$ 341,330,132
==============
3
Transportation Resources, Inc.
Consolidated Statement of Income
Year Ended December 31, 2006
Operating Revenues $ 427,638,927
--------------
Operating Expenses
Salaries, wages and fringe benefits 175,290,931
Fuel and supplies 63,152,713
Depreciation 45,101,633
Equipment rent and purchased transportation 33,050,429
Operating taxes and licenses 29,349,199
Insurance and claims 18,884,910
Communications and utilities 2,946,134
Gain on asset disposition (12,997,675)
Other operating expenses 4,518,414
--------------
Total operating expenses 359,296,688
--------------
Operating Income 68,342,239
--------------
Other Income (Expense)
Interest income 956,482
Interest expense (405,602)
Investment income 4,481
Other (49,621)
--------------
Total other income 505,740
--------------
Income Before Income Taxes 68,847,979
--------------
Provision for Income Taxes
State income tax 855,780
Foreign income tax 168,592
--------------
Net Income $ 67,823,607
==============
4
Transportation Resources, Inc.
Consolidated Statement of Shareholders' Equity
Year Ended December 31, 2006
Earnings Other
Additional Reinvested Accumulated
Common Paid-in in the Comprehensive Treasury
Stock Capital Business Income (Loss) Stock Total
-------------- -------------- -------------- -------------- -------------- --------------
Balance, January 1, 2006,
as previously reported $ 59,716 $ 158,839,192 $ 57,859,230 $ 78,069 $ (174,358) $ 216,661,849
-------------- -------------- -------------- -------------- -------------- --------------
Retrospective Change in
Accounting Principle
(Note 8) (4,060) (6,074,444) (1,422,280) -- 174,358 (7,326,426)
-------------- -------------- -------------- -------------- -------------- --------------
Balance, January 1, 2006 $ 55,656 $ 152,764,748 $ 56,436,950 $ 78,069 $ -- $ 209,335,423
-------------- -------------- -------------- -------------- -------------- --------------
Net income -- 67,823,607 -- -- 67,823,607
Foreign currency
translation -- -- -- (30,449) -- (30,449)
-------------- -------------- -------------- -------------- -------------- --------------
Total comprehensive
income -- -- 67,823,607 (30,449) -- 67,793,158
Cash distributions -- -- (14,755,437) -- -- (14,755,437)
-------------- -------------- -------------- -------------- -------------- --------------
Balance,
December 31, 2006 $ 55,656 $ 152,764,748 $ 109,505,120 $ 47,620 $ -- $ 262,373,144
============== ============== ============== ============== ============== ==============
5
Transportation Resources, Inc.
Consolidated Statement of Cash Flows
Year Ended December 31, 2006
Operating Activities
Net income $ 67,823,607
Items not requiring (providing) cash
Depreciation 45,101,633
Gain on disposition of operating property (12,755,215)
Non-cash compensation expense 5,334,029
Changes in
Accounts receivable 1,305,755
Prepaid expenses (1,889,584)
Accounts payable 454,586
Other current and accrued liabilities (1,033,435)
Other assets and liabilities (455,230)
--------------
Net cash provided by operating activities 103,886,146
--------------
Investing Activities
Proceeds from maturities of short-term investments 916,000
Purchases of short-term investments (917,000)
Purchases of property and equipment (137,928,355)
Proceeds from disposition of operating property 32,688,211
--------------
Net cash used in investing activities (105,241,144)
--------------
Financing Activities
Net borrowings under line-of-credit agreement 6,440,000
Principal payments on long-term debt (3,788,497)
Proceeds from issuance of long-term debt 1,106,642
Outstanding checks in excess of bank balance 3,342,083
Cash distributions (14,755,437)
--------------
Net cash used in financing activities (7,655,209)
--------------
Decrease in Cash and Cash Equivalents (9,010,207)
Cash and Cash Equivalents, Beginning of Year 13,291,638
--------------
Cash and Cash Equivalents, End of Year $ 4,281,431
==============
Supplemental Cash Flows Information
Interest paid $ 326,528
Income taxes paid 1,710,682
6
Transportation Resources, Inc.
Notes to Consolidated Financial Statements
December 31, 2006
Note 1: Significant Accounting Policies
Nature of Operations
Transportation Resources, Inc. (the Company) is a holding company whose
majority-owned subsidiaries and primary business activities are:
Subsidiary Business Activity
- --------------------------------------------------------------------------------
Contract Freighters, Inc. Truckload carrier
Transportation Equipment Leasing, LLC Transportation equipment leasing
Transportation Property Leasing, LLC Property leasing
Orcas Aircraft Leasing, Inc. Aircraft leasing
CFI Custom Freight Management, Inc. Transportation logistics
Orcas Logistics, Inc. Transportation logistics
The Company and the above subsidiaries operate primarily in the United
States of America (U.S.) and Canada.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. All significant intercompany
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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. Actual
results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all liquid investments with original maturities of
three months or less to be cash equivalents. At December 31, 2006, cash
equivalents consisted primarily of money market investment accounts. The
carrying amount reported in the balance sheet for cash and cash
equivalents approximates its fair value.
The Company maintains its cash in bank deposit accounts which, at times,
may exceed federally insured limits. The Company has not experienced any
losses in such accounts. The Company believes it is not exposed to any
significant credit risk on cash and cash equivalents.
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Accounts Receivable
Accounts receivable are stated at the amount billed to customers. The
Company provides an allowance for uncollectible accounts, which is based
upon a review of outstanding receivables, historical collection
information and existing economic conditions. Accounts receivable are
ordinarily due 15 days from the invoice date. Accounts outstanding more
than 30 days from the invoice date are considered delinquent. Delinquent
receivables are written off based on individual credit evaluation and
specific circumstances of the customer.
The accounts receivable portfolio is well diversified geographically and
by industry. Credit is granted to customers and ongoing credit
evaluations are performed, thereby eliminating the need for collateral.
Historically, credit losses have been minimal.
Operating Supplies, Fuel and Parts
Operating supplies, fuel and parts are stated at the lower of cost or
market (operating supplies and parts on an average cost basis and fuel on
the first-in, first-out basis).
Tires
The cost of tires purchased on new revenue equipment is recorded as a
prepaid asset and amortized over the estimated tire life. Replacement
tires are expensed as they are removed from inventory and placed on the
operating equipment.
Property and Equipment
Property and equipment are recorded at cost, with such cost depreciated
using the straight-line method beginning when property is placed in
service. Depreciation is based on the following useful lives:
Structures 20 years
Trailers 6 years
Tractors 5 years
Other operating property 3-10 years
Prior to 2006, when revenue equipment was traded with either a vendor
from whom replacement equipment was acquired or a qualified intermediary
and its trade-in value exceeded its book value, the purchase price of the
replacement property was reduced by this excess when calculating the
depreciable basis of the new property. When revenue equipment was sold
and replacement property was not acquired, any gain or loss was
recognized. When other properties were sold, any gain or loss was
reflected in income.
In 2006, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 153, Exchanges of Nonmonetary Assets - An Amendment of APB
Opinion No. 29, as discussed in Note 9.
8
Capitalized Software
Certain internal and external costs incurred to acquire or create
internal use software are capitalized in accordance with Statement of
Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. Capitalized software is included in property
and equipment under furniture, fixtures and data processing equipment and
is amortized over its useful life when development is complete.
Claims and Insurance Accruals
Insurance programs for liability (personal injury and property damage),
workers' compensation and group health claims are self-insured up to
certain retention limits which vary depending upon the year of
occurrence. The claims and insurance accruals represent the estimated
uninsured portion of pending claims, including adverse development of
known claims, legal fees, and incurred but not reported claims. Claims
expected to be paid beyond one year of the balance sheet date are
classified as long-term. These estimates are based on historical
information along with certain assumptions about future events. Changes
in assumptions as well as changes in actual experience could cause these
estimates to change.
Insurance Program Retention Limits
Program Retention Limit
-----------------------------------------------------------------------------
Liability $1,000,000 per claim
Workers' compensation $ 500,000 per claim
Group health $ 150,000 per claim/1,000,000 per
individual lifetime maximum
Fair Values of Financial Instruments
The carrying amounts reported in the balance sheet for cash and cash
equivalents, accounts receivable, accounts payable, other accrued
liabilities and variable interest borrowings approximate their fair
values. The fair value of notes payable at December 31, 2006 is
estimated to be $2,080,894 using a discounted cash flow analysis, based
on the estimated current borrowing rate for similar types of borrowing
arrangements. These amounts relate to borrowings with fixed interest
rates and principal balances of $2,049,311 in current maturities of long-
term debt at December 31, 2006.
Income Taxes
The shareholders of the Company have elected to be taxed individually on
the Company's earnings under the S Corporation provisions of the Internal
Revenue Code. Accordingly, federal income taxes are not reflected in the
Company's financial statements. The provision for income taxes reflected
in these statements is for foreign and certain state income taxes only.
9
Comprehensive Income
The Company reports the components of other comprehensive income in the
consolidated statement of shareholders' equity. Comprehensive income
refers to revenues, expenses, gains and losses that are included in
comprehensive income but excluded from net income. At December 31, 2006,
other comprehensive income consisted of foreign currency translation
adjustments.
Revenue Recognition
For the truckload carrier subsidiary, operating revenues are recognized
at the time the shipment is received from the customer. For
transportation logistics subsidiaries, operating revenues are recognized
when the services are performed. Related transportation and delivery
expenses directly associated with these shipments are recorded at the
time the revenue is recognized. Included as a reduction to fuel and
supplies expense in 2006 are $85,081,757 in fuel surcharges earned when
fuel costs exceeded contractually agreed-upon levels. The fuel surcharges
are based on the United States Department of Energy diesel fuel index.
Maintenance and Repairs
Maintenance and repairs are charged to operations in the period incurred.
Note 2: Long-term Debt
Notes payable to financial institutions due through 2007,
bearing interest at rates ranging from 6.39% to 8.30%,
collateralized by revenue equipment having a net book
value of $309,670 at December 31, 2006 $ 49,311
Senior secured note payable to an insurance company due
June 2007, bearing interest at 9.08%, secured by a First
Deed of Trust 2, 000,000
Promissory note payable to financial institution due March
2009, bearing interest at 6.58% 1, 106,642
--------------
3, 155,953
Less current maturities 2, 049,311
--------------
$ 1, 106,642
==============
10
Note 3: Line of Credit and Other Short-Term Borrowings
A subsidiary, Transportation Equipment Leasing, LLC (TEL), has secured
revolving credit facilities with four banks that provide for maximum
borrowings of $30,000,000 prior to September 30, 2007, although any
borrowings may, at TEL's option, be converted to a two-year term loan on
or before September 30, 2007. The credit facilities are secured by
assignments of lease proceeds for certain groups of equipment leased by
TEL to its major customer, Contract Freighters, Inc. Interest on
outstanding borrowings is based on the Daily Reset LIBOR rate (5.35% as
of December 31, 2006) plus an increment ranging from 45 to 65 basis
points. As of December 31, 2006, there was a total of $6,440,000
outstanding on the four credit facilities with $23,560,000 available for
additional advances.
Another subsidiary, Contract Freighters, Inc., has an unsecured revolving
credit facility with a bank that provides for maximum borrowings or
letters of credit issuances in the amount of $25,000,000 prior to November
30, 2007, and $6,000,000 thereafter through December 1, 2008. There were
$11,508,368 in undrawn upon letters of credit outstanding as of December
31, 2006. There was capacity for advances or additional letters of
credit in the amount of $13,491,632 at December 31, 2006. Interest on
outstanding borrowings (none at December 31, 2006) is based on the Daily
Reset LIBOR rate plus an increment ranging from 50 to 100 basis points,
depending upon a defined financial ratio. This facility contains a
conditional security agreement that becomes effective upon the occurrence
of certain triggering events as defined in the agreement. The revolving
credit facility contains customary covenants which, among other things,
require that certain financial ratios are maintained.
Note 4: Retirement Plan
A 401(k) profit-sharing plan is available to U.S. employees who have
completed one year of service. Participants may contribute between 1%
and 50% of their compensation to the plan. The Company matches 50% of
the participants' contributions up to 7% of individual compensation.
Matching contributions were $1,040,410 in 2006.
Note 5: Stock Based Awards
The Company has a management stock incentive plan under which stock
awards may be granted to key employees of the Company and its
subsidiaries as designated by the Board of Directors. A maximum of 15%
of the total number of issued and outstanding shares of Company stock may
be issued pursuant to this plan. Fair value of the stock issued is equal
to the net book value per share of the Company as of the end of the
calendar month immediately preceding the date of the grant. Provisions
of the plan restrict the sale and transfer of shares. Upon any
retirement or cessation of employment, the shares must be sold to the
Company at net book value as of the preceding month end.
11
There was $2,943,895 of non-cash compensation expense related to the
appreciation in book value of the shares outstanding under this plan.
Certain recipients of the grants may elect to receive a component of the
grant in cash. The book value of the stock awards and cash payments
elected under the plan provision were charged against current earnings
and totaled $5,914,755.
Note 6: General Litigation
The Company is subject to claims and lawsuits that arise primarily in the
ordinary course of business. It is the opinion of management that the
disposition or ultimate resolution of such claims and lawsuits will not
have a material adverse effect on the consolidated financial position,
results of operations and cash flows of the Company.
Note 7: Subsequent Events
On January 9, 2007, the Board of Directors declared a distribution of
$2,594,575 to shareholders of record as of that date, paid on January
12, 2007.
Note 8: Adoption of New Accounting Standard - Stock-Based Compensation
In 2006, the Company adopted the 2004 revision of Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, in accordance with the modified retrospective transition
method. The modified retrospective transition method allows the Company
to adjust financial statements for prior periods to give effect to the
fair-value-based method of accounting for stock awards granted, modified
or settled in cash in prior years. Because the Company's award program
provides stock awards to be settled at net book value, the awards are
valued at net book value which approximates fair value.
Adoption of SFAS No. 123 required the Company to reduce equity and
increase long-term liabilities by $7,326,426 for awards granted prior to
January 1, 2006. As of January 1, 2006, previously reported equity was
reduced and long-term liabilities were increased by $7,326,426.
Previously reported compensation expense for the year ended December 31,
2005, was increased by $147,999.
Note 9: Adoption of New Accounting Standard - Exchanges of Nonmonetary Assets
In 2006, the Company adopted SFAS No. 153, Exchanges of Nonmonetary
Assets - An Amendment of APB Opinion No. 29. APB Opinion No. 29,
Accounting for Nonmonetary Transactions, requires that exchanges of
nonmonetary assets be measured and reported on the fair value of the
assets exchanged. The opinion provided certain exceptions to that
principle for the exchange of similar productive assets. SFAS No. 153
eliminates that exception. Prior to 2006, the Company reduced the
carrying value of new tractors and trailers by any gain on trades.
Beginning in 2006, gains are reported on the fair value of assets
exchanged and resulted in $12,778,811 of gains recognized for the year
ended December 31, 2006.
12
Note 10:Future Change in Accounting Principles
The Financial Accounting Standards Board recently issued Interpretation No.
48 Accounting for Uncertainty in Income Taxes, which clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with FASB Statement No. 109, Accounting
for Income Taxes. The Company expects to first apply the new statement
during fiscal year ending December 31, 2007. The impact of applying the
new statement has not yet been determined.
The Financial Accounting Standards Board recently issued Statement No. 157
Fair Value Measurements, which requires expanded disclosures about fair
value measurements. The Company expects to first apply the new statement
during fiscal year ending December 31, 2008, through prospective
application. The impact of applying the new statement has not yet been
determined.
13