FORM 10-Q
________________________________________________
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006.
Commission File No. 1-8129.
US 1 INDUSTRIES, INC.
_____________________________
(Exact name of registrant as specified in its charter)
Indiana 95-3585609
_____________ ______________________________
(State of Incorporation) (I.R.S. Employer Identification No.)
336 W. US 30, Ste 201, Valparaiso, Indiana 46385
___________________________________________ ____________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (219)476-1300
________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes _X_ No ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes ___ No _X_
As of August 11 2006, there were 12,018,224 shares of registrant's common
stock outstanding.
US 1 INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2006 (UNAUDITED) AND DECEMBER 31, 2005
Part I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
ASSETS
June 30, December 31,
2006 2005
(Unaudited)
CURRENT ASSETS:
Accounts receivable-trade, less allowances for
doubtful accounts of $1,644,000 and $1,365,000
respectively 29,114,860 28,108,082
Other receivables, including receivables due
from affiliated entities of $80,000 and
$144,000, respectively 2,469,416 2,343,563
Prepaid expenses and other current assets 671,735 509,919
Current deferred tax asset 600,000 987,348
----------- ----------
Total current assets 32,856,011 31,948,912
FIXED ASSETS:
Equipment 984,898 859,602
Less accumulated depreciation and amortization (629,692) (574,810)
----------- ----------
Net fixed assets 355,206 284,792
----------- -----------
ASSETS HELD FOR SALE:
Land 195,347 195,347
Valuation allowance (141,347) (141,347)
----------- -----------
Net assets held for sale 54,000 54,000
Non-current deferred tax asset 600,000 600,000
Notes Receivable Long Term 413,905 0
Other Assets 386,037 402,219
----------- -----------
TOTAL ASSETS $34,665,159 $33,289,923
=========== ===========
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
US 1 INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2006 (UNAUDITED) AND DECEMBER 31, 2005
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, December 31,
2006 2005
(Unaudited)
CURRENT LIABILITIES:
Revolving line of credit $ 6,024,126 $ 7,206,358
Accounts payable 11,187,691 10,557,403
Accrued expenses 1,613,764 890,026
Insurance and claims 2,166,945 1,879,623
Accrued compensation 62,444 259,601
Accrued interest 1,179,883 1,213,227
Fuel and other taxes payable 56,996 434,404
Accrued legal settlements 317,000 0
----------- ------------
Total current liabilities 22,608,849 22,440,642
----------- ------------
LONG-TERM DEBT (RELATED PARTY) 2,749,124 2,769,708
MINORITY INTEREST 385,464 170,089
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, authorized 20,000,000 shares;
no par value; 12,018,224 shares outstanding 42,596,639 42,596,639
as of June 30, 2006 and December 31, 2005.
Accumulated deficit (33,674,917) (34,687,155)
----------- -----------
Total shareholders' equity 8,921,722 7,909,484
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 34,665,159 $ 33,289,923
=========== ============
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
US 1 INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED)
Three Months Ended Six Months Ended
2006 2005 2006 2005
OPERATING REVENUES $48,326,531 $43,991,364 $ 92,901,772 $83,490,929
----------- ---------- ----------- ----------
OPERATING EXPENSES:
Purchased transportation 35,390,419 32,959,864 67,494,278 62,723,006
Commissions 5,478,234 4,570,095 10,574,838 8,117,849
Insurance and claims 1,529,599 1,664,009 3,063,006 3,270,099
Salaries, wages, and
other 3,106,621 2,424,364 6,109,922 4,507,768
Other operating expenses 2,363,656 1,688,889 4,078,488 3,328,299
---------- ---------- ---------- ----------
Total operating
expenses 47,868,529 43,307,221 91,320,532 81,947,021
----------- ---------- ---------- ----------
OPERATING INCOME 458,002 684,143 1,581,240 1,543,908
----------- ---------- ---------- ----------
NON-OPERATION INCOME (EXPENSE)
Interest income 4,335 7,960 13,310 31,992
Interest (expense) (184,627) (136,013) (358,233) (259,841)
Other income 10,060 119,575 38,421 184,403
----------- ---------- ---------- ----------
Total non-operating
(expense) (170,232) (8,478) (306,502) (43,446)
----------- ---------- ---------- ----------
INCOME BEFORE MINORITY
INTEREST $ 287,770 $ 675,665 $1,274,738 $ 1,500,462
Minority Interest Expense 88,681 72,660 215,375 117,128
----------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES $ 199,089 $ 603,005 $1,059,363 $ 1,383,334
Income taxes expense
(benefit) (117,842) 86,930 47,125 150,674
----------- ---------- ---------- ----------
NET INCOME AVAILABLE TO
COMMON SHARES 316,931 516,075 1,012,238 1,232,660
Basic and Diluted Net Income $0.03 $0.04 $0.08 $0.10
Per Common Share
WEIGHTED AVERAGE SHARES
OUTSTANDING - 12,018,224 12,018,224 12,018,224 12,018,224
BASIC AND DILUTED
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
US 1 INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2006
Total
Common Common Accumulated Shareholders'
Shares Stock Deficit Equity
_______________________________________________________
Balance, January 1, 2006 12,018,224 $42,596,639 $(34,687,155) $7,909,484
Net income for the six
months ended
June 30, 2006 0 0 1,012,238 1,012,238
Balance, June 30, 2006 12,018,224 $42,596,639 $(33,674,917) $8,921,722
_______________________________________________________
<FN>
The accompanying notes are in integral part of the consolidated financial statements.
</FN>
US 1 INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
JUNE 30, 2006 AND JUNE 30, 2005 (UNAUDITED)
Six Months Ended June 30,
2006 2005
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income 1,012,238 1,232,660
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 72,677 118,862
Gain on disposal of assets (2,322) (29,033)
Provision for bad debts 708,883 441,020
Minority interest expense 215,375 117,128
Deferred tax expense 387,348 0
Changes in operating assets and liabilities:
Accounts receivable - trade (1,715,661) (1,696,253)
Other receivables (125,853) (844,959)
Prepaid expenses and other assets (559,539) (42,780)
Accounts payable 630,288 984,314
Accrued expenses 723,738 505,762
Accrued interest (33,344) (60,808)
Insurance and claims 287,322 134,451
Accrued compensation (197,157) 181,061
Fuel and other taxes payable (377,408) 200,704
Accrued Legal 317,000 (191,666)
--------- --------
Net cash provided by operating activities 1,343,585 1,050,463
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to fixed assets (146,096) (33,004)
Proceeds from sales of fixed assets 5,327 80,700
-------- ---------
Net cash (used in) provided by investing activities (140,769) 47,696
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments under the line of credit (1,182,232) (978,159)
Repayments of shareholder loans (20,584) 0
Distributions to minority interest 0 (120,000)
--------- ---------
Net cash used in financing activities (1,202,816) (1,098,159)
--------- ---------
NET CHANGE IN CASH 0 0
CASH, BEGINNING OF PERIOD 0 0
--------- ---------
CASH, END OF PERIOD 0 0
========= =========
Cash paid for interest $392,000 $320,000
========= =========
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
US 1 INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
1. BASIS OF PRESENTATION
The accompanying consolidated balance sheet as of June 30, 2006 and the
consolidated statements of income, shareholders' equity and cash flows for
the three and six month periods ended June 30, 2006 and 2005 are unaudited,
but, in the opinion of management, include all adjustments (consisting of
normal, recurring accruals) necessary for a fair presentation of the financial
position and the results of operations at such date and for such periods.
The year-end balance sheet data was derived from audited financial statements.
These statements should be read in conjunction with US 1 Industries, Inc. and
Subsidiaries' ("the Company") audited consolidated financial statements for
the year ended December 31, 2005, and the notes thereto included in the
Company's Annual Report on Form 10-K. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted, as permitted
by the requirements of the Securities and Exchange Commission, although the
Company believes that the disclosures included in these financial statements
are adequate to make the information not misleading. The results of operations
for the three and six months ended June 30, 2006 and 2005 are not necessarily
indicative of the results for a full year.
2. RECLASSIFICATIONS
Certain reclassifications have been made to the previously reported 2005
financial statement to conform with the 2006 presentation.
3. EARNINGS PER SHARE
The Company calculates earnings per share ("EPS") in accordance with
SFAS No. 128. Following is the reconciliation of the numerators and
denominators of basic and diluted EPS.
Three Months Ended Six Months Ended
2006 2005 2006 2005
Net income available to common $316,931 $516,075 $1,012,238 $1,232,660
Shareholders for basic
and diluted EPS
Denominator
Weighted average common shares
outstanding
For basic and diluted EPS 12,018,224 12,018,224 12,018,224 12,018,224
4. BANK LINE OF CREDIT
The Company and its subsidiaries have a $10.0 million line of credit
that matures on October 1, 2007. Advances under this revolving line of credit
are limited to 75% of eligible accounts receivable. Unused availability under
this line of credit was $4.0 million at June 30, 2006. The interest rate is
based upon certain financial covenants and may range from prime to prime less
..50%. At June 30, 2006, the interest rate on this line of credit was at prime
less .25% (8.0%). The Company's accounts receivable, property, and other
assets collateralize advances under the agreement. Borrowings up to $1.5
million are guaranteed by the Chief Executive Officer and Chief Financial
Officer of the Company. At June 30, 2006 the outstanding borrowings on this
line of credit were $6.0 million.
This line of credit is subject to termination upon various events of
default, including failure to remit timely payments of interest, fees and
principal, any adverse change in the business of the Company or failure to
meet certain financial covenants. Financial covenants include: minimum net
worth requirements, total debt service coverage ratio, and prohibition of
additional indebtedness without prior authorization. At June 30, 2006, the
Company was in compliance with these financial covenants. The balance
outstanding under this line-of-credit agreement is classified as a current
liability at June 20, 2006.
On October 20, 2005, the Company and its subsidiaries entered into an
Interest Rate Swap Agreement with U.S. Bank effective November 1, 2005 through
November 1, 2008. This agreement is in the notional amount of $3,000,000.
The agreement caps the interest rate at 7.71% through the term of the
agreement. The fair value of the interest rate swap was minimal at
June 30, 2006.
5. LEGAL PROCEEDINGS
On November 4, 2005, Terrell C. Coleman and Willie B. Crocker
("Plaintiffs") filed a putative class action complaint (the "Complaint")
in the United States District Court for the Middle District of Florida
(the "Court") in Jacksonville, Florida, against Patriot Logistics, Inc.
("Patriot"). The Complaint alleges that certain aspects of Patriot's motor
carrier leases with its independent-contractor owner-operators violate
certain federal leasing regulations, and seeks injunctive relief, an
unspecified amount of damages, and attorney's fees. On January 6, 2006,
Defendant served an Answer denying most elements of the Complaint and
asserting Affirmative Defenses. On March 10, 2006, the Court denied, in
virtually all respects, Plaintiffs' motion to strike Defendant's
Affirmative Defenses. On March 30, 2006, the Court denied Defendant's
motion to transfer venue to the U.S. District Court for the Northern
District of Indiana. On April 3, 2006, Plaintiffs filed class
certification motion. Through a mediation on May 16, 2006, the parties
reached a proposed Settlement Agreement. On July 10, 2006, the Court
granted the parties' agreed motion to preliminarily certify a nationwide
plaintiff class and Jacksonville, Florida subclass, to appoint class
counsel, to approve a form of class notice, and to schedule for October
26, 2006, a fairness hearing at which to determine whether to certify
the class and subclass and approve the proposed Settlement Agreement.
If approved by the Court at the fairness hearing, the Settlement
Agreement will result in payments to the named plaintiffs, the members
of the nationwide class, and the members of the Jacksonville, Florida
subclass totaling $115,000; issuance of a new, more detailed Company
lease to owner-operators; an award of attorneys' fees to Plaintiffs'
attorneys of $200,000 (to be paid in installments beginning 10 days,
and ending 100 days, after the Court's approval of the Settlement
Agreement becomes final and non-appealable); and broad releases by
5. LEGAL PROCEEDINGS (continued)
Plaintiffs and Defendant of all claims and counterclaims relating to
the subject matter of the litigation. All proceedings in the case have
been stayed pending the Court's final review of the Settlement
Agreement following the fairness hearing." The Company has accrued
$315,000 for this lawsuit as of June 30, 2006.
The Company and its subsidiaries are involved in other litigation in
the normal course of its business. Management intends to vigorously defend
these cases. In the opinion of management, the other litigation now pending
will not have a material adverse affect on the consolidated financial
statements of the Company.
Results of Operations
You should read the following discussion regarding the Company and its
subsidiaries along with the Company's consolidated financial statements and
related notes included in this quarterly report. The following discussion
contains forward-looking statements that are subject to risks, uncertainties
and assumptions. The Company's actual results, performance and achievements
in 2005 and beyond may differ materially from those expressed in, or implied
by, these forward-looking statements.
The financial statements and related notes contained elsewhere in this
Form 10-Q as of and for the three months and six months ended June 30, 2006
and 2005 and in the Company's Form 10-K for its fiscal year ended December 31,
2005, are essential to an understanding of the comparisons and are
incorporated by reference into the discussion that follows.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
Six months ended June 30, 2006 compared to the six months ended June 30, 2005
The following table sets forth the percentage relationships of expense items
to revenue for the six months ended June 30, 2006 and June 30, 2005:
2006 2005
------ ------
Revenue 100.0% 100.0%
Operating expenses:
Purchased transportation 72.7 75.1
Commissions 11.4 9.7
Insurance and claims 3.3 3.9
Salaries, wages and other 6.6 5.4
Other operating expenses 4.4 4.0
------- ------
Total operating expenses 98.4 98.1
------ ------
Operating income 1.6 1.9
The Company's operating revenues increased to $92.9 million for the six
months ended June 30, 2006 from $83.5 million for the same period in 2005.
This is an increase of 11.3%. This increase is attributable to the continued
growth of Patriot Logistics, Inc., Keystone Lines Inc., Carolina National
Transportation Inc., and US 1 Logistics, Inc. The growth of these subsidiaries
is primarily attributable to the addition of new terminals and growth of
existing terminals.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION (Continued)
Purchased transportation represents the amount an independent contractor
is paid to haul freight and is primarily based on a contractually agreed-upon
percentage of revenue generated by the haul for truck capacity provided by
independent contractors. Purchased transportation is the largest component of
operating expenses. Purchased transportation and commission expense increase
or decrease in proportion to the revenue generated through independent
contractors. Purchased transportation decreased to 72.7% of revenue for the
six months ended June 30, 2006 from 75.1% for the six months ended June 30,
2005. This decrease was somewhat offset by the increase in commission expense.
Many agents negotiate a combined percentage payable for purchased
transportation and commission. The mix between the amounts of purchased
transportation paid versus commissions paid may vary slightly based on agent
negotiations with independent owner operators. However, in total, commissions
and purchased transportation would typically be expected to remain relatively
consistent as a percentage of revenue.
Commissions to agents and brokers are primarily based on contractually
agreed-upon percentages of revenue. Commissions increased to 11.4% of revenue
for the six months ended June 30, 2006 from 9.7% of revenue for the six months
ended June 30, 2005. In total, purchased transportation and commissions
was 84.1% of revenue for the six months ended June 30, 2006 compared to 84.8%
of revenue for the six months ended June 30, 2005.
Insurance and claims decreased slightly to 3.3% of revenue for the six
months ended June 30, 2006 compared to 3.9% of revenue for the six months
ended June 30, 2005. A majority of the insurance and claims expense is based
on a percentage of revenue and, as a result, will increase or decrease on a
consolidated basis with the Company's revenue. Potential liability associated
with accidents in the trucking industry is severe and occurrences are
unpredictable. A material increase in the frequency or severity of accidents
or the unfavorable development of existing claims could adversely affect the
Company's operating income. The decrease of 0.6% of revenue can be attributed
to the decrease of certain operations' claim activity.
Salaries, wages, and fringe benefits were 6.6% of revenue for the six
months ended June 30, 2006 compared to 5.4% of revenue for the six months ended
June 30, 2005. This increase of 1.2% can be attributed to the addition of
personnel hired to accommodate the growth of expanding terminals that have not
yet begun to or did not produce at their full revenue potential.
Other operating expenses as a percentage of revenue increased to 4.4% of
revenue for the six months ended June 30, 2006 from 4.0% for the six months
ended June 30, 2005. While not all operating expenses are directly variable
with revenues, the increased revenue directly impacts several components of
operating expenses such as bad debt expense. In addition, the Company's
subsidiaries have expanded by adding new terminal and operations resulting
in the addition of new locations. This growth has resulted in an increase
in operating expenses such as rent. Operating expense increased $0.8 million
from $3.3 million for the six months ended June 30, 2005 to $4.1 million for
the six months ended June 30, 2006. Three factors that contribute to this
increase are changes in rent expense, bad debt expense, and litigation expense.
Rent expense increased by $.16 million from $.41 million for the six months
ended June 30, 2005 to $.57 million for the six months ended June 30, 2006.
Bad debt expense increased by $.27 million from $.44 million for the six
months ended June 30, 2005 to $.71 million for the six month ended June 30,
2006. The Company booked an accrual for a potential litigation judgment in
June, 2006. This accrual resulted in an increase to other operating expenses
for the six months ended June 30, 2006 of $0.31 million.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION (Continued)
Based on the changes in revenue and expenses described above, operating
income increased slightly by $37,332. Operating income for the six months
ended June 30, 2006 was $1,581,240 compared to $1,543,908 for the six months
ended June 30, 2005.
Interest expense increased by $98,392 in 2006. Interest expense
for the six months ended June 30, 2006 was $358,233 compared to interest
expense of $259,841 for the six months ended June 30, 2005. This increase
in interest expense is the result of increasing interest rates. The rate on
the Company's loan with US Bank is currently based on certain financial
covenants and may range from prime to prime less .50%. At June 30, 2006,
the interest rate charged on the loan with US Bank was prime less .25%
(8.00%). At June 30, 2005 the interest rate charged on the loan with US
Bank was prime (6.00%).
Other income includes income from rental property, storage and equipment
usage fees. Other income decreased $145,982 for the six months ended June
30, 2006. Non-operating (income) expense, exclusive of interest expense,
was ($51,731) for the six months ended June 30, 2006 versus ($216,395) for
the six months ended June 30, 2005. This decrease was due primarily to a
reduction of rental income in 2006 and the gain on the sale of equipment
the Company recognized during the first quarter of 2005 that did not occur
in 2006.
The Company also recognized minority interest expenses of $215,375 and
$117,128 for the six months ended June 30, 2006 and 2005, respectively relating
to the minority shareholders' portion of its subsidiary's, Carolina National
Transportation, Inc., net income. Carolina National Transportation, Inc. is
a 60% owned subsidiary of the company.
As a result of the factors described above, net income for the six
months ended June 30, 2006 was $1,012,238 compared with $1,232,660 for the
same period in 2005.
Three months ended June 30, 2006 compared to the three months ended
June 30, 2005.
The following table sets forth the percentage relationships of expense
items to revenue for the three months ended June 30, 2006 and June 30, 2005:
2006 2005
------ ------
Revenue 100.0% 100.0%
Operating expenses:
Purchased transportation 73.2 74.9
Commissions 11.3 10.4
Insurance and claims 3.2 3.8
Salaries, wages and fringe benefits 6.4 5.5
Other operating expenses 4.9 3.9
------- ------
Total operating expenses 99.0 98.5
------ ------
Operating income 1.0 1.5
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION (Continued)
The Company's operating revenues increased to $48.3 million for the
three months ended June 30, 2006 from $44.0 million for the same period
in 2005. This is an increase of 9.8%. This increase is attributable to the
continued growth of Patriot Logistics, Inc., Keystone Lines Inc., Carolina
National Transportation, Inc., and US 1 Logistics, Inc. The growth of these
subsidiaries is primarily attributable to the addition of new terminals and
growth of existing terminals.
Purchased transportation represents the amount an independent contractor
is paid to haul freight and is primarily based on a contractually agreed-upon
percentage of revenue generated by the haul for truck capacity provided by
independent contractors. Purchased transportation is the largest component of
operating expenses. Purchased transportation and commission expense increase
or decrease in proportion to the revenue generated through independent
contractors. Purchased transportation decreased to 73.2% of revenue for the
three months ended June 30, 2006 from 74.9% for the three months ended
June 30, 2005. This decrease was somewhat offset by the increase in commission
expense. Many agents negotiate a combined percentage payable for purchased
transportation and commission. The mix between the amounts of purchased
transportation paid versus commissions paid may vary slightly based on agent
negotiations with independent owner operators. However, in total, commissions
and purchased transportation would typically be expected to remain relatively
consistent as a percentage of revenue.
Commissions to agents and brokers are primarily based on contractually
agreed-upon percentages of revenue. Commissions increased to 11.3% of
revenue for the three months ended June 30, 2006 from 10.4% of revenue for the
three months ended June 30, 2005. As previously described, the increase in
commissions of 0.9% of revenue was partially offset by the decrease in
purchased transportation of 1.7%. In total, purchased transportation and
commission increased as a percentage of revenue by 0.8%. Minor fluctuations
in these percentages can be expected as each agent has slightly different
negotiated rates and as the mix of our business changes, these percentages
may fluctuate slightly.
Insurance and claims decreased to 3.2% of revenue for the three months
ended June 30, 2006 from 3.8% of revenue for the three months ended
June 30, 2005. A majority of the insurance and claims expense is based on a
percentage of revenue and, as a result, will increase or decrease on a
consolidated basis with the Company's revenue. Potential liability
associated with accidents in the trucking industry is severe and occurrences
are unpredictable. A material increase in the frequency or severity of
accidents or the unfavorable development of existing claims could adversely
affect the Company's operating income. The decrease of 0.6% of revenue can
be attributed to the decrease of certain operations' claim activity.
Salaries, wages, and fringe benefits were 6.4% of revenue for the three
months ended June 30, 2006 compared to 5.5% of revenue for the three months
ended June 30, 2005. A significant portion of salaries, wages and other is
a fixed expense, which does not fluctuate proportionately with revenue. This
increase of 0.9% can be attributed to the addition of personnel hired to
accommodate the growth of expanding terminals that have not yet begun to or
did not produce at their full revenue potential.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION (Continued)
Other operating expenses as a percentage of revenue increased to 4.9%
for the three months ended June 30, 2006 from 3.9% for the same period in
2005. While not all operating expenses are directly variable with revenues,
the increased revenue directly impacts several components of operating
expenses such as bad debt expense. In addition, the Company's subsidiaries
have expanded by adding new terminal and operations resulting in the addition
of new locations. This growth has resulted in an increase in operating
expenses such as rent. Operating expenses increased $0.7 million from $1.7
million for the three months ended June 30, 2006 to $2.4 million for the
three months ended June 30, 2005. Factors that contribute to this increase
are changes in rent expense, bad debt expense, and litigation expense. Rent
expense increased by $.06 million from $.22 million for the three months ended
June 30, 2005 to $.28 million for the three months ended June 30, 2006.
Bad debt expense increased by $.22 million from $.20 million for the three
months ended June 30, 2005 to $.42 million for the three months ended June 30,
2006. The Company booked an accrual for a potential litigation judgment in
June, 2006. This accrual resulted in an increase to other operating expenses
for the three months ended June 30, 2006 of $0.31 million.
Based on the changes in revenue and expenses described above, operating
income decreased by $226,141. Operating income for the three months ended
June 30, 2006 was $458,002 compared to $684,143 for the three months ended
June 30, 2005.
Interest expense increased by $48,614, from $136,013 for the three months
ended June 30, 2005 to $184,627 for the three months ended June 30, 2006.
This increase in interest expense is primarily attributable to an increase in
interest rates charged on the Company's line of credit. The rate on the
Company's loan with US Bank is currently based on certain financial covenants
and may range from prime to prime less .50%. At June 30, 2006, the interest
rate charged on the loan with US Bank was prime less .25% (8.0%). At
June 30, 2005 the interest rate on this loan was Prime (6.0%).
Other income includes income from rental property, storage and equipment
usage fees. Other income decreased $109,515 for the three months ended
June 30, 2006. Non-operating (income) expense, exclusive of interest expense,
was ($14,395) for the three months ended June 30, 2006 versus ($127,535)
for the three months ended June 30, 2005. This decrease was due primarily to
a reduction of rental income in 2006 and the gain on the sale of equipment the
Company recognized during the first quarter of 2005 that did not occur in 2006.
Minority interest expense was $88,681 and $72,660 for the three months
ended June 30, 2006 and 2005, respectively, relating to the minority
shareholders' portion of its subsidiary's, Carolina National Transportation,
Inc., net income. Carolina National Transportation, Inc. is a 60% owned
subsidiary of the Company.
As a result of the factors described above, net income for the three
months ended June 30, 2006 was $316,931 compared with $516,075 for the same
period in 2005.
Liquidity and Capital Resources
Net cash provided by operating activities increased $0.3 million from
$1,050,463 for the six months ended June 30, 2005 to $1,343,585 for the six
months ended June 30, 2006.
Cash provided by operations before changes in working capital needs
increased $0.5 million from $1.9 million at June 30, 2005 to $2.4 million at
June 30, 2006. Because the Company continues to experience growth, a
significant amount of the cash generated from operations is used to fund this
growth and the related working capital needs. Cash used to fund these working
capital needs increased approximately $0.17 million from $0.83 million
for the six months ended June 30, 2005 to $1.0 million for the six months
ended June 30, 2006 as the impact of increased accounts receivable was only
partially offset by increased accounts payable and accrued expenses.
Typically, the Company pays independent owner operators and agents in
7 - 15 days. However, the Company's customers typically pay in 30 - 45 days.
Net cash (used in) provided by investing activities was ($140,769) for
the six months ended June 30, 2006 compared to $47,696 for the six months
ended June 30, 2005. Net cash used in investing activities increased due
to additions to fixed assets in 2006 relating primarily to capital additions
for our new headquarters in Valparaiso, Indiana.
Net cash used in financing activities increased $104,657 from $1,098,159
for the six months ended June 30, 2005 to $1,202,816 for the six months ended
June 30, 2006. This increase is due primarily to net repayments on the line
of credit.
The Company and its subsidiaries have a $10.0 million line of credit that
matures on October 1, 2007. Advances under this revolving line of credit are
limited to 75% of eligible accounts receivable. Unused availability under this
line of credit was $4.0 million at June 30, 2006. The interest rate is based
upon certain financial covenants and may range from prime to prime less .50%.
At June 30, 2006, the interest rate on this line of credit was at prime less
..25% (8.00%). The Company's accounts receivable, property, and other assets
collateralize advances under the agreement. Borrowings up to $1.5 million are
guaranteed by the Chief Executive Officer and Chief Financial Officer of the
Company. At June 30, 2006 the outstanding borrowings on this line of credit
were $6.0 million.
This line of credit is subject to termination upon various events of
default, including failure to remit timely payments of interest, fees and
principal, any adverse change in the business of the Company or failure to
meet certain financial covenants. Financial covenants include: minimum net
worth requirements, total debt service coverage ratio, capital expenditure
limitations, and prohibition of additional indebtedness without prior
authorization. At June 30, 2006, the Company was in compliance with these
financial covenants. The balance outstanding under this line-of-credit
agreement is classified as a current liability at June 30, 2006.
The Company is dependent upon the funds available under its line of credit
agreement for liquidity. As long as the Company can fund 25% of its accounts
receivable from funds generated internally from operations or otherwise, this
facility has historically provided the Company sufficient liquidity to meet its
needs on an ongoing basis.
Liquidity and Capital Resources (continued)
The Company believes it has a system of internal controls designed to
enable it to produce accurate and timely financial reports. As a result of the
Sarbanes-Oxley Act and the recently adopted rules of the Securities & Exchange
Commission and the Public Company Accounting Oversight Board, in connection
with the audit of the Company's consolidated financial statements for the
fiscal year ending December 31, 2007, the Company will be required to furnish
the SEC with management's and the Company's independent auditors' attestation
with regard to the operation of its internal controls. In order to provide
those attestations, the Company will have to revise, replace and supplement
portions of its internal controls and will have to comprehensively document
all of its internal controls. The Company has not yet developed plans to
fully accomplish this, although preliminarily it has concluded that it will
require substantial work likely to cost in excess of $500,000 plus the time of
management and several employees. Further, given the limited resources of
the Company, it is not entirely clear whether the Company will be able to
meet this deadline.
Quantitative and Qualitative Disclosures About Market Risk
Inflation
Changes in freight rates charged by the Company to its customers are
generally reflected in the cost of purchased transportation and commissions
paid by the Company to independent contractors and agents, respectively.
Therefore, management believes that future-operating results of the Company
will be affected primarily by changes in volume of business. Rising fuel
prices are generally offset by a fuel surcharge the Company passes onto
its customers. However, due to the highly competitive nature of the
truckload motor carrier industry, it is possible that future freight rates,
cost of purchased transportation, as well as fuel prices may fluctuate,
affecting the Company's profitability.
Interest Rate Risk
The Company has a revolving line of credit with a bank, which currently
bears interest at the prime rate less .25% (at June 30, 2006 the rate was
8.00%). The interest rate is based on certain financial covenants and may
range from prime to prime less .50%. The Company also has subordinated debt
with related parties which bears interest at prime + .75%.
Certain Relationships and Related Transactions.
The Company leased office space for its headquarters in Gary, Indiana,
for $4,000 monthly, from Michael E. Kibler, the President and Chief Executive
Officer and a director of the Company, and Harold E. Antonson, the Chief
Financial Officer, Treasurer and a director of the Company through the first
quarter of 2006. In April, 2006, the Company relocated its headquarters to
Valparaiso, Indiana. The Company now pays rent to an outside vendor in the
amount of $7,000 monthly.
One of the Company's subsidiaries provides safety, management, and
accounting services to companies controlled by the President and Chief
Financial Officer of the Company. These services are priced to cover the
cost of the employees providing the services and the overhead.
The Company has approximately $80,000 of other accounts receivable
due from entities that could be deemed to be under common control as of
June 30, 2006.
Certain Relationships and Related Transactions (continued)
One of the Company's insurance providers, American Inter-Fidelity
Exchange (AIFE), is managed by a director of the Company. The Company has an
investment of $126,461 in AIFE. AIFE provides auto liability and cargo
insurance to several subsidiaries of the Company as well as other entities,
some of which are related to the Company by common ownership.
The Company exercises no control over the operations of AIFE. As a result,
the Company recorded its investment in AIFE under the cost method of accounting
as of June 30, 2006 and for the three and six months ended June 30, 2006 and
2005. Under the cost method, the investment in AIFE is reflected at its
original amount and income is recognized only to the extent of dividends paid
by AIFE. There were no dividends declared by AIFE for the three and six
months ended June 30, 2006 and 2005.
If AIFE incurs a net loss, the loss may be allocated to the various
policyholders based on each policyholder's premium as a percentage of the
total premiums of AIFE for the related period. There has been no such loss
assessment for the three and six months ended June 30, 2006 or 2005. For
fiscal 2005, the Company accounted for the majority of the total premium
revenue of AIFE. At December 31, 2005, AIFE had net worth of approximately
$7.9 million, part of which is attributable to other policyholders of AIFE.
In addition, the Chief Executive Officer and Chief Financial Officer,
as well as another director of the Company, are the sole shareholders of
American Inter-Fidelity Corporation (AIFC), which serves as the attorney
in fact of AIFE. AIFC is entitled to receive a management fee from AIFE.
AIFE incurred management fees of approximately $300,000, $405,000, and
$354,000 for the years ended December 31, 2005, 2004, and 2003, respectively.
The Company also pays a consulting fee of $2,000 per month, to a director
of the Company, relating to insurance services.
The Company has long-term notes payable due to its Chief Executive
Officer, Chief Financial Officer, and August Investment Partnership, an
entity affiliated through common ownership, totaling approximately $2.7 million
at June 30, 2006. In addition, the Company had approximately $1.1 million
of accrued interest due under these notes payable.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Based on their
evaluations as of the end of the period covered by the report,
our principal executive officer and principal financial officer,
with the participation of our full management team, have concluded
that our disclosure controls and procedures (as defined in Rules
13(a)-14(c) and 15(d)-14(c) under the Securities Exchange Act) are
effective to ensure that information required to be disclosed by us
in reports that we file or submit under the Securities Exchange Act
is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the SEC.
(b) Changes in controls. There were no changes in our internal controls
over financial reporting identified in connection with the evaluations
reported above that occurred during our last fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our
internal controls over financial reporting.
(c) Disclosure controls and procedures. Disclosure controls and procedures
are our controls and other procedures that are designed to ensure that
information required to be disclosed by us in the reports that we file
or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by us in
the reports that we file under the Exchange Act is accumulated and
communicated to our management, including our principal executive
officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure.
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) (1) List of Exhibits
The following exhibits, numbered in accordance with Item 601 of
Regulation S-K, are filed as part of this report:
Exhibit 31.1 Certification 302 of Chief Executive Officer
Exhibit 31.2 Certification 302 of Chief Financial Officer
Exhibit 32.1 Certification 906 of Chief Executive Officer
Exhibit 32.2 Certification 906 of Chief Financial Officer
(b)(1) Reports on Form 8-K
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
US 1 Industries, Inc.
Michael E. Kibler
Chief Executive Officer
Harold E. Antonson
Chief Financial Officer
August 14, 2006