FORM 10-Q
________________________________________________
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007.
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,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 November 2, 2007, there were 14,838,657 shares of registrant's common
stock outstanding.
US 1 INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2007 (UNAUDITED) AND DECEMBER 31, 2006
Part I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
ASSETS
September 30, December 31,
2007 2006
(Unaudited)
CURRENT ASSETS:
Accounts receivable-trade, less allowances for
doubtful accounts of $1,456,000 and $992,000
respectively 28,658,170 25,764,263
Other receivables, including receivables due
from affiliated entities and officers
of $532,000 and $691,000, respectively 3,537,650 3,159,640
Prepaid expenses and other current assets 1,171,235 875,834
Current deferred tax asset 717,400 717,400
----------- ----------
Total current assets 34,084,455 30,517,137
FIXED ASSETS:
Land 195,347 195,347
Equipment 1,207,551 952,675
Less accumulated depreciation and amortization (679,908) (573,501)
----------- ----------
Net fixed assets 722,990 574,521
----------- -----------
Non-current deferred tax asset 717,400 717,400
Notes Receivable - Long Term 423,139 368,754
Other Assets 386,037 386,037
----------- -----------
TOTAL ASSETS $36,334,021 $32,563,849
=========== ===========
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
US 1 INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2007 (UNAUDITED) AND DECEMBER 31, 2006
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, December 31,
2007 2006
(Unaudited)
CURRENT LIABILITIES:
Revolving line of credit $ 2,905,719 $ 3,633,784
Related Party Convertible subordinated debt,
Net of Unamortized discount of $0
and $313,000 as of September 30, 2007 and
December 31, 2006, respectively 0 3,637,037
Accounts payable 12,983,700 9,594,681
Accrued expenses 721,347 988,823
Accrued remediation costs 141,347 141,347
Insurance and claims 1,807,012 1,507,980
Accrued compensation 31,416 127,381
Accrued interest 84,480 32,595
Fuel and other taxes payable 754,511 353,853
----------- ------------
Total current liabilities 19,429,532 20,019,481
----------- ------------
MINORITY INTEREST 822,991 1,159,542
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, authorized 20,000,000 shares;
no par value; 14,838,657 shares and 46,920,288 42,970,288
12,169,187 shares as of September 30, 2007
and December 31, 2006, respectively.
Treasury Stock, 595,248 shares and 0 shares as
of September 30, 2007 and December 31, 2006,
respectively. (952,513) 0
Accumulated deficit (29,886,277) (31,585,462)
----------- -----------
Total shareholders' equity 16,081,498 11,384,826
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 36,334,021 $ 32,563,849
=========== ============
<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 NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 (UNAUDITED)
Three Months Ended Nine Months Ended
2007 2006 2007 2006
OPERATING REVENUES $46,378,369 $49,505,422 $140,199,933 $142,407,194
----------- ---------- ----------- ----------
OPERATING EXPENSES:
Purchased transportation 33,233,966 36,116,463 100,920,444 103,610,741
Commissions 5,735,333 5,956,739 16,867,290 16,531,577
Insurance and claims 1,513,103 1,523,981 4,639,939 4,586,987
Salaries, wages, and other 2,786,070 2,772,778 8,387,589 8,548,281
Other operating expenses 1,832,162 1,928,745 5,656,572 6,341,652
----------- ---------- ---------- ----------
Total operating expenses 45,100,634 48,298,706 136,471,834 139,619,238
----------- ---------- ---------- ----------
OPERATING INCOME 1,277,735 1,206,716 3,728,099 2,787,956
----------- ---------- ---------- ----------
NON-OPERATION INCOME (EXPENSE)
Interest income 0 6,770 2,467 20,080
Interest (expense) (243,460) (231,231) (731,361) (589,464)
Other income 224,115 71,643 360,985 110,064
----------- ---------- ---------- ----------
Total non-operating
(expense) (19,345) (152,818) (367,909) (459,320)
----------- ---------- ---------- ----------
INCOME BEFORE MINORITY INTEREST $ 1,258,390 $1,053,898 $3,360,190 $ 2,328,636
Minority Interest Expense 410,650 327,632 899,450 543,007
----------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES $ 847,740 $ 726,266 $2,460,740 $ 1,785,629
Income taxes expense
(benefit) 58,680 19,939 186,555 67,064
----------- ---------- ---------- ----------
NET INCOME AVAILABLE
TO COMMON SHARES 789,060 706,327 2,274,185 1,718,565
Basic Net Income
Per Common Shares $0.06 $0.06 $0.19 $0.14
Diluted Net Income
Per Common Share $0.06 $0.06 $0.19 $0.14
WEIGHTED AVERAGE
SHARES OUTSTANDING - BASIC 12,139,393 12,018,224 12,159,512 12,018,224
WEIGHTED AVERAGE SHARES
OUTSTANDING - DILUTED 12,139,393 12,018,224 13,048,770 12,018,224
<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 NINE MONTHS ENDED SEPTEMBER 30, 2007
Total
Common Treasury Accumulated Shareholders'
Shares Stock Shares Stock Deficit Equity
___________________________________________________________________________________________
Balance,
January 1, 2006 12,169,739 $42,970,288 $0 $(31,585,462) $11,384,826
Treasury stock
repurchase (595,248) (952,513) (952,513)
Conversion of debt into
Equity 2,668,918 3,950,000 3,950,000
Cumulative effect of adoption
of FIN 48 (575,000) (575,000)
Net income for the nine months ended
September 30, 2007 2,274,185 2,274,185
Balance, September 30, 2007
___________________________________________________________________________________________
14,838,657 $46,920,288 (595,248) $ (952,513) $(29,886,277) $16,081,498
<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
SEPTEMBER 30, 2007 AND SEPTEMBER 30, 2006 (UNAUDITED)
Nine Months Ended September 30,
2007 2006
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income 2,274,185 1,718,565
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Depreciation and amortization 114,087 101,686
Gain on disposal of assets (662) 57,410
Provision for bad debts 480,045 934,022
Amortization of discount on convertible debt 312,963 0
Minority interest expense 899,450 543,007
Deferred tax expense 0 387,348
Changes in operating assets and liabilities:
Accounts receivable - trade (3,373,953) (4,228,123)
Other receivables (378,010) (3,431)
Notes receivable (54,385) 0
Prepaid expenses and other assets (295,401) (677,521)
Accounts payable 3,389,019 691,838
Accrued expenses (267,476) 245,883
Accrued interest 51,885 10,814
Insurance and claims 299,032 (90,748)
Accrued compensation (95,965) (201,077)
Fuel and other taxes payable (176,342) (347,024)
Accrued Legal 0 317,000
--------- --------
Net cash provided by (used in) operating activities 3,178,472 (540,351)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to fixed assets (285,894) (237,877)
Proceeds from sales of fixed assets 24,000 5,327
-------- ---------
Net cash used in investing activities (261,894) (232,550)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under the line of credit (728,065) 793,485
Repayments of shareholder loans 0 (20,584)
Purchase of treasury stock (952,513) 0
Distributions to minority interest (1,236,000) 0
--------- ---------
Net cash (used in) provided by financing activities (2,916,578) 772,901
--------- ---------
NET CHANGE IN CASH 0 0
CASH, BEGINNING OF PERIOD 0 0
--------- ---------
CASH, END OF PERIOD 0 0
========= =========
Cash paid for interest $366,513 $578,650
========= =========
In September 2007, the Company issued 2,668,918 shares of its common stock to
the holders of the convertible debt as the holders exercised the conversion feature
of this debt.
<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
NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
1. BASIS OF PRESENTATION
The accompanying consolidated balance sheet as of September 30, 2007
and the consolidated statements of income, shareholders' equity and cash
flows for the three and nine month periods ended September 30, 2007 and
2006 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,
2006, and the notes thereto included in the Company's Annual Report on Form
10-K. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted, as permitted by the requirements of
the Securities and Exchange Commission, although the Company believes that
the disclosures included in these financial statements are adequate to make
the information not misleading. The results of operations for the three and
nine months ended September 30, 2007 and 2006 are not necessarily indicative
of the results for a full year.
2. RECLASSIFICATIONS
Certain reclassifications have been made to the previously reported 2006
financial statement to conform with the 2007 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 Nine Months Ended
2007 2006 2007 2006
Net income available to common $789,060 $706,327 $2,274,185 $1,718,565
Shareholders for basic EPS
Interest expense on convertible
debt 0 0 66,000 0
Discount amortization on convertible
debt 0 0 108,000 0
Net income available to common $789,060 $706,327 $2,448,185 $1,718,565
Shareholders for diluted EPS
Denominator
Weighted average common shares
outstanding
For basic EPS 12,139,393 12,018,224 12,159,512 12,018,224
Shares issuable upon
conversion of
Convertible debt (1) 0 0 889,258 0
Weighted average common shares
outstanding
For diluted EPS 12,139,393 12,018,224 13,048,770 12,018,224
(1) Common stock equivalants for convertible debt for the three months ended
September 30, 2007 were excluded from weighted-average common shares
outstanding for diluted EPS because the effect would be anit-dilutive.
4. REVENUE RECOGNITION
Revenue for freight is recognized upon delivery. The Company accounts
for its revenue in accordance with EITF 99-19, "Reporting Revenue Gross as a
Principal Versus Net as an Agent". Amounts payable for purchased
transportation, commissions and insurance are accrued when incurred. The
Company follows guidance of EITF 99-19 and records revenues at the gross
amount billed to customers because the Company (1) determined it operates as
the primary obligor, (2) typically is responsible for damages to goods and
(3) bears the credit risk.
5. NOTES RECEIVABLE
The Company makes advances under notes receivable to certain agents and
owner operators in the normal course of its business. Currently, the Company
has a note receivable with an agent in the original amount of $500,000 which
is repayable in monthly installments of $8,333 with the final payment due in
June 2011. The balance on this note was approximately $388,000 and $470,000
at September 30, 2007 and December 31, 2006, respectively.
The remainder of the balance of notes receivable consists of 15 notes
resulting from advances to agents and owner operators. The remaining balance
on these notes is $465,025 and $124,896 as of September 30, 2007 and December
31, 2006, respectively. These notes bear interest at rates ranging from 9.5%
to 17% with weekly payments ranging from approximately $100 - $5,000. Maturity
on these notes receivable ranges from November 2007 through July 2011.
The current portion of these notes receivable totals $429,692 and
$226,142 at September 30, 2007 and December 31, 2006, respectively and is
classified in other receivables in the Company's consolidated balance
sheet.
6. BANK LINE OF CREDIT
The Company and its subsidiaries have a $15.0 million line of credit
that matures on October 1, 2008. Advances under this revolving line of
credit are limited to 75% of eligible accounts receivable. Unused
availability under this line of credit was $12.1 million at September 30,
2007. The interest rate is based upon certain financial covenants and may
range from prime to prime less .75%. At September 30, 2007, the interest
rate on this line of credit was at prime less .75% (7.00%). 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 September
30, 2007, the outstanding borrowings on this line of credit were $2.9 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 September 30, 2007,
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 September 30, 2007. The Company's accounts receivable,
property, and other assets collateralize advances under the agreement.
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
September 30, 2007.
7. EQUITY TRANSACTIONS
(a) In September 2007, the Company's Chief Executive Officer and Chief
Financial Officer elected to exercise the conversion feature on certain
convertible debt held by these individuals. As a result, the debt with
a principal value of $3,950,000 was converted into 2,668,918 shares of
the Company's common stock.
(b) During 2007, the Company purchased 595,248 shares of its common
stock for a total of $952,513. These shares are reflected as treasury stock
in the Company's balance sheet and statement of shareholders equity as of
and for the nine months ended September 30, 2007.
8. COMMITMENTS AND CONTINGENCIES
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.
In October 2006, the Company and the general manager of Patriot
Logistics, Inc. a wholly owned subsidiary of the Company, entered into an
agreement under which the Company granted the individual the option to
purchase 100% of the outstanding stock of Patriot for a purchase price equal
to the book value of Patriot. The option is immediately exercisable and may
be exercised in whole (not in part) at any time prior to October 2008. In
the event the option were exercised, based upon the actual results of Patriot
Logistics, our revenue would have declined by $30,141,698 and $35,721,348
(a decrease of 21.50% and 25.08%, respectively) for the nine months ended
September 30, 2007 and 2006, respectively. Patriot Logistics had pre-tax
income (loss) of $271,055 and ($326,780) for the nine months ended September
30, 2007 and 2006, respectively.
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 2007 and beyond may differ materially from those
expressed in, or implied by, these forward-looking statements.
The financial statements and related notes contained elsewhere in this
Form 10-Q as of and for the three months and nine months ended September 30,
2007 and 2006 and in the Company's Form 10-K for its fiscal year ended
December 31, 2006, are essential to an understanding of the comparisons and
are incorporated by reference into the discussion that follows.
Historically salaries, wages, fringe benefits, and other operating
expenses had been principally non-variable expenses and remained relatively
fixed with slight changes in relationship to revenue. However, since the
Company has added certain operations, which utilize employees rather than
independent agents, these non-variable expenses may not be directly
comparable.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
Nine months ended September 30, 2007 compared to the nine months ended
September 30, 2006
The following table sets forth the percentage relationships of expense items
to revenue for the nine months ended September 30, 2007 and September 30,
2006:
2007 2006
------ ------
Revenue 100.0% 100.0%
Operating expenses:
Purchased transportation 72.0 72.8
Commissions 12.0 11.6
Insurance and claims 3.3 3.2
Salaries, wages and other 6.0 6.0
Other operating expenses 4.0 4.4
------- ------
Total operating expenses 97.3 98.0
------ ------
Operating income 2.7 1.9
The Company's operating revenues decreased to $140.2 million for the nine
months ended September 30, 2007 from $142.4 million for the same period in
2006. This is a decrease of 1.5%. The decrease is attributable to the closing
of offices at one of the Company's subsidiaries and a decrease in revenues
from one of the Company's larger customers. These changes have decreased the
volume of loads.
Purchased transportation and commission expense generally increase or
decrease in proportion to the revenue generated through independent contractors.
Many agents negotiate a combined percentage payable for purchased
transportation and commission. In addition, pay on certain types of revenue
may be higher than for other types of revenue. Thus a change in the mix of
revenue can cause some variation in the percent paid out for purchased
transportation and commission. However, in total, commissions and purchased
transportation would typically be expected to remain relatively consistent as
percentage of revenue. Purchased transportation and commission together
decreased 0.4% from 84.4% as a percentage of revenue for the nine months
ended September 30, 2006 to 84.0% as a percentage of revenue for the same
period of time in 2007. Purchased transportation expense decreased 0.8% as
a percentage of operating revenue from 72.8% for the nine months ended September
30, 2006 to 72.0% for the nine months ended September 30, 2007. A factor
contributing to the decrease in purchased transportation is the closing of
one of Company's offices that paid out purchased transportation at a higher
rate than is customary.
Commission expense increased 0.4% as a percentage of operating revenue from
11.6% for the nine months ended September 30, 2006 to 12.0% for the nine months
ended September 30, 2007. This increase in commission expense was offset by
the decrease in purchased transportation.
Salaries expense remained consistent at 6.0% of revenue for the nine
months ended September 30, 2006 and for the nine months ended September 30,
2007.
Insurance and claims increased slightly to 3.3% of revenue for the nine
months ended September 30, 2007 from 3.2% of revenue for the same period of
time in 2006. 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.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION (continued)
Nine months ended September 30, 2007 compared to the nine months ended
September 30, 2006 (continued)
Other operating expenses decreased to 4.0% of revenue for the nine
months ended September 30, 2007 from 4.4% of revenue for the nine months
ended September 30, 2006. The Company booked an accrual for a potential
litigation judgment in 2006. This accrual resulted in an increase to other
operating expenses for the nine months ended September 30, 2006 of $0.31
million or 0.22% of revenue. The Company had no such accrual for the nine
months ended September 30, 2007. Another factor that decreased operating
expenses for the nine months ended September 30, 2007 compared to the same
period of time in 2006 was improved collections of old debts at one of the
Company's terminals whose improved efforts reduced bad debt expense by $0.49
million or 0.35% of revenue.
Interest expense increased by $141,897, from $589,464 for the nine months
ended September 30, 2006 to $731,361 for the nine months ended September 30,
2007. This increase in interest expense is primarily attributable to an
increase in interest on related party debt.
The Company also recognized minority interest expense of $899,450 for
the nine months ended September 30, 2007 and $543,007 for the nine months
ended September 30, 2006 relating to the minority shareholders' portion of
its subsidiary's, Carolina National Transportation, LLC, net income for the
nine months ended September 30, 2007 and 2006, respectively. Carolina
National Transportation, LLC, is a 60% owned subsidiary of the Company.
Federal and state income taxes increased $119,491 from $67,064 for the
nine months ended September 30, 2006 to $186,555 for the nine months ended
September 30, 2007. The Company has net operating loss carry-forwards of
approximately $9.0 million at December 31, 2006. These carry-forwards are
available to offset taxable income in future years and substantially all of
these carry-forwards will expire in the years 2007 through 2010. This
increase in tax expense relates to increased state taxes.
As a result of the factors discussed above, including decreases in
purchased transportation, increases in commissions, increases in interest,
and increases in income taxes, net income for the nine months ended September
30, 2007 increased by $555,620 from $1,718,565 for the nine months ended
September 30, 2006 to $2,274,185 for the nine months ended September 30,
2007.
Three months ended September 30, 2007 compared to the three months ended
September 30, 2006.
The following table sets forth the percentage relationships of expense items
to revenue for the three months ended September 30, 2007 and September 30,
2006:
2007 2006
------ ------
Revenue 100.0% 100.0%
Operating expenses:
Purchased transportation 71.7 73.0
Commissions 12.3 12.0
Insurance and claims 3.3 3.1
Salaries, wages and fringe benefits 6.0 5.6
Other operating expenses 3.9 3.9
------- ------
Total operating expenses 97.2 97.6
------ ------
Operating income 2.8 2.4
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION (Continued)
The Company's operating revenues decreased to $46.4 million for the
three months ended September 30, 2007 from $49.5 million for the same period
in 2006. This is a decrease of 6.3%. The decrease is attributable to the
closing of offices at one of the Company's subsidiaries and a decrease in
revenues from one of the Company's larger customers. These changes have
decreased the volume of loads during the third quarter of 2007.
Purchased transportation and commission expense generally increase or
decrease in proportion to the revenue generated through independent
contractors. Many agents negotiate a combined percentage payable for
purchased transportation and commission. In addition, pay on certain types
of revenue may be higher than for other types of revenue. Thus a change in
the mix of revenue can cause some variation in the percent paid out for
purchased transportation and commission. However, in total, commissions
and purchased transportation would typically be expected to remain relatively
consistent as a percentage of revenue. Purchased transportation expense
decreased 1.3% as a percentage of operating revenue from 73.0% for the three
months ended September 30, 2006 to 71.7% for the three months ended
September 30, 2007. This decrease in purchased transportation is partially
offset by an increase in commission expense. A factor contributing to the
decrease in purchased transportation is the closing of one of Company's
offices that paid out purchased transportation at a higher rate than is
customary.
Commission expense increased 0.3% as a percentage of operating revenue
from 12.0% for the three months ended September 30, 2006 compared to 12.3%
for the three months ended September 30, 2007. The increase in commission
was more than offset by the decrease in purchased transportation.
Salaries expense increased 0.4% as a percentage of operating revenue
from 5.6% for the three months ended September 30, 2006 to 6.0% for the
three months ended September 30, 2007. This increase in salaries expense can
be attributed to several factors. One of the Company's subsidiaries that
utilized employees instead of agents has experienced a decrease in revenue
without a corresponding decrease in salaries. There were several
operations that have salaries expense for the three months ended September
30, 2007 that were not open during the three months ended September 30,
2006. These offices have not yet begun to produce to their full potential
and as such, salaries expense is high as a percentage of their revenues.
Insurance and claims increased to 3.3% of revenue for the three months
ended September 30, 2007 from 3.1% for the same period of time in 2006. A
majority of the insurance and claims expense is based on a percentage of
revenue and, as a result, will increase or decrease on a consolidated basis
with the Company's revenue.
Potential liability associated with accidents in the trucking industry is
severe and occurrences are unpredictable. A material increase in the frequency
or severity of accidents or the unfavorable development of existing claims
could adversely affect the Company's operating income. The increase of 0.2%
of revenue can be attributed to the increase of certain operations' claim
activity.
Other operating expenses have remained consistent at 3.9% of revenue for
the nine months ended September 30, 2007 and for the same period of time for
2006.
Interest expense increased by $12,229, from $231,231 for the three
months ended September 30, 2006 to $243,460 for the three months ended
September 30, 2007. This increase in interest expense is primarily
attributable to an increase in interest on related party debt.
The Company also recognized minority interest expense of $410,650 for the
three months ended September 30, 2007 and $327,632 for the three months ended
September 30, 2006 relating to the minority shareholders' portion of its
subsidiary's, Carolina National Transportation, LLC, net income for the three
months ended September 30, 2007 and 2006, respectively. Carolina National
Transportation, LLC, is a 60% owned subsidiary of the Company.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION (Continued)
Three months ended September 30, 2007 compared to the three months ended
September 30, 2006 (Continued)
Federal and state income tax expense increased $38,741 from $19,939 for
the three months ended September 30, 2006 to $58,680 for the three months
ended September 30, 2007. The Company has net operating loss carry-forwards
of approximately $9.0 million at December 31, 2006. These carry-forwards are
available to offset taxable income in future years and substantially all of
these carry-forwards will expire in the years 2007 through 2010
As a result of the factors discussed above, net income for the three
months ended September 30, 2007 increased by $82,733 from $706,327 for the
three months ended September 30, 2006 to $789,060 for the three months ended
September 30, 2007.
Liquidity and Capital Resources
Net cash provided by (used in) operating activities increased $3,718,823
from ($540,351) for the nine months ended September 30, 2006 to $3,178,472 for
the nine months ended September 30, 2007. The increase in cash provided by
operating activity was primarily due to an increase in accounts payable for
the nine months ended September 30, 2007 of $3,389,020. This increase in
accounts payable is due to a decrease in cash paid for certain expenses that
are directly related to operations, including purchased transportation,
commissions, and insurance. In addition, there were decreases in cash paid
to vendors for other non-variable obligations. The Company utilizes a vendor
that provides advances to drivers for fuel purchases. This vendor has
granted additional increases in the Company's credit limit. This increase
resulted in the Company being able to reduce the frequency of payments to
this vendor, thus, increasing accounts payable and cash availability. The
increase in accounts payable was largely offset by an increase in accounts
receivable for the nine months ended September 30, 2007. Accounts receivable
increased $3,373,953 for the nine months ended September 30, 2007. The
increase in accounts receivable for the nine months ended September 30, 2007
is attributable to a decline in the rate of collections.
Cash provided by operations before changes in working capital increased
$338,030 from $3,742,038 for the nine months ended September 30, 2006 to
$4,080,068 for the nine months ended September 30, 2007. This increase is
primarily attributable to an increase in net income for the nine months ended
September 30, 2007.
Net cash used in investing activities was $261,894 for the nine months
ended September 30, 2007 compared to $232,550 for the nine months ended
September 30, 2006. Net cash used in investing activities increased
primarily due to the purchase of fixed assets.
Net cash (used in) provided by financing activities decreased
(3,689,479) from $772,901 for the nine months ended September 30, 2006 to
($2,916,578) for the nine months ended September 30, 2007. For the nine
months ended September 30, 2007, net repayments under the line of credit
increased $728,065. For the nine months ended September 31, 2007, the
Company distributed $1,236,000 to shareholders of the Company's majority
owned subsidiary, Carolina National Transportation, LLC. In addition, the
Company utilized $952,913 to repurchase treasury stock.
The Company and its subsidiaries have a $15.0 million line of credit that
matures on October 1, 2008. Advances under this revolving line of credit
are limited to 75% of eligible accounts receivable. Unused availability
under this line of credit was $12.1 million at September 30, 2007. The
interest rate is based upon certain financial covenants and may range from
prime to prime less .75%. At September 30, 2007, the interest rate on this
line of credit was at prime less .75% (7.00%). 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 September
30, 2007, the outstanding borrowings on this line of credit were $2.9
million.
Liquidity and Capital Resources (Continued)
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 September 30, 2007,
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 September 30, 2007. The Company's accounts receivable,
property, and other assets collateralize advances under the agreement.
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 .75% (at September 30, 2007 the rate
was 7.00%). At September 30, 2007 the interest rate was based on certain
financial covenants and ranged from prime to prime less .75%. The Company
had approximately $3.95 million of debt payable to the Chief Executive
Officer and Chief Financial Officer or entities under their control with
interest at prime less 1%. In September 2007 these notes were converted
into common stock of the Company.
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
September 30, 2007.
Certain Relationships and Related Transactions.
One of the Company's subsidiaries provides safety, management, and
accounting services to companies controlled by the Chief Executive Officer
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 $219,000 of other accounts receivable due
from entities that could be deemed to be under common control as of September
30, 2007. On July 3, 2007, the Company provided replacement financing of
$312,552 to its Chief Executive Officer and Chief Financial Officer with
respect to a terminal facility leased by them to Patriot Logistics in order
to insure the continued availability of that facility to Patriot Logistics
following the maturity of the then exiting financing. The replacement
financing will be repaid prior to December 31, 2007.
One of the subsidiaries insurance providers, AIFE, is managed by a
Director of the Company and the Company has an investment of $126,461 in
the provider. AIFE provides auto liability and cargo insurance to several
subsidiaries of the Company as well as other entities related to the Company
by common ownership. For the years ended December 31, 2006, 2005 and 2004,
cash paid to AIFE for insurance premiums and deductibles was approximately
$8,268,000, $4,787,000, and $5,673,000, respectively.
Certain Relationships and Related Transactions (continued)
The subsidiaries exercised no control over the operations of AIFE. As
a result, the Company recorded its investment in AIFE under the cost method
of accounting for each of the three years in the period ended December 31,
2006. Under the cost method, the investment in AIFE is reflected at its
original amount and income is recognized only to the extent of dividends paid
by the investee. There were no dividends declared by AIFE for the three or
nine months ended September 30, 2007 and 2006.
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 each of the three years in the period ended December 31, 2006
or the nine months ended September 30, 2007. The subsidiaries currently
account for the majority of the premiums of AIFE. For fiscal 2006, the
Company through its subsidiaries accounted for approximately 65% of the
total premium revenue of AIFE. At December 31, 2006, AIFE had net worth of
approximately $9.6 million.
For the year ended December 31, 2006, AIFE paid a commission due to
favorable claims experience to a subsidiary insurance agency of US1
Industries, Inc. for $400,000. The Company has earned income of $153,000
during the nine months ended September 30, 2007 for commissions.
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 $505,000, $300,000, and $405,000 for the
years ended December 31, 2006, 2005, and 2004, respectively. As of September
30, 2007, there have been no management fees received from AIFE for 2007.
In 2006 the Company paid consulting fees of $19,000 to Robert I.
Scissors, one of its directors, relating to insurance services.
The Company had notes payable due to its Chief Executive Officer and
Chief Financial Officer that were converted into 2,668,918 shares of common
stock of the Company in September 2007.
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.
Item 4. Controls and Procedures (Continued)
(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 5. Stock Repurchase
On August 22, 2007, the Company repurchased 594,696 shares of its common
stock at market price for a total of $951,514.
Item 6. Exhibits and Reports on Form 8-K
(a) (1) List of Exhibits
The following exhibits, numbered in accordance with Item 601 of
Regulation S-K, are filed as part of this report:
Exhibit 31.1 Certification 302 of Chief Executive Officer
Exhibit 31.2 Certification 302 of Chief Financial Officer
Exhibit 32.1 Certification 906 of Chief Executive Officer
Exhibit 32.2 Certification 906 of Chief Financial Officer
(b)(1) Reports on Form 8-K
Form 8-K filed on September 24, 2007, furnishing information regarding
the Unregistered Sales of Equity Securities that holders of the Company's
Convertible Notes due 2007 converted a total of $3,950,000 in aggregate
principal amount of the notes, which represented all of the outstanding
Notes, into an aggregate of 2,668,918 shares of the Company's common stock.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
US 1 Industries, Inc.
Michael E. Kibler
Chief Executive Officer
Harold E. Antonson
Chief Financial Officer
November 12, 2007