UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-12070
TRANSFINANCIAL HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 46-0278762
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
8245 Nieman Road, Suite 100
Lenexa, Kansas 66214
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (913) 859-0055
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at October 22, 1999
Common stock, $0.01 par value 3,252,370 Shares
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TRANSFINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(In thousands, except per share amounts)
(Unaudited)
1999 1998
Operating Revenues.......................................................... $ 39,294 $ 39,614
Operating Expenses.......................................................... 40,653 43,645
Operating Income (Loss)..................................................... (1,359) (4,031)
Nonoperating Income (Expense)
Interest income.......................................................... 23 111
Interest expense......................................................... (331) (5)
Other.................................................................... 22 68
Total nonoperating income (expense).................................. (286) 174
Income (Loss) Before Income Taxes........................................... (1,645) (3,857)
Income Tax Provision (Benefit).............................................. (610) (1,383)
Net Income (Loss)........................................................... $ (1,035) $ (2,474)
Basic and Diluted Earnings (Loss) Per Share................................. $ (0.32) $ (0.50)
Basic Average Shares Outstanding............................................ 3,276 4,964
Diluted Average Shares Outstanding.......................................... 3,294 4,980
<FN>
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
TRANSFINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(In thousands, except per share amounts)
(Unaudited)
1999 1998
Operating Revenues.......................................................... $ 119,412 $113,652
Operating Expenses.......................................................... 120,944 117,117
Operating Income (Loss)..................................................... (1,532) (3,465)
Nonoperating Income (Expense)
Interest income.......................................................... 70 265
Interest expense......................................................... (876) (73)
Other.................................................................... 31 163
Total nonoperating income (expense).................................. (775) 355
Income (Loss) Before Income Taxes........................................... (2,307) (3,110)
Income Tax Provision (Benefit).............................................. (779) (973)
Net Income (Loss)........................................................... $ (1,528) $ (2,137)
Basic and Diluted Earnings (Loss) Per Share................................. $ (0.44) $ (0.38)
Basic Average Shares Outstanding............................................ 3,461 5,684
Diluted Average Shares Outstanding.......................................... 3,469 5,715
<FN>
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
TRANSFINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
SEPTEMBER 30, DECEMBER 31,
1999 1998
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents................................................ $ 1,530 $ 3,256
Freight accounts receivable, less allowance
for credit losses of $200 and $387................................... 15,050 13,351
Finance accounts receivable, less allowance
for credit losses of $767 and $566................................... 15,628 12,584
Current deferred income taxes............................................ 2,640 2,548
Other current assets..................................................... 3,509 2,401
Total current assets................................................. 38,357 34,140
Operating Property, at Cost:
Revenue equipment........................................................ 30,835 31,969
Land..................................................................... 3,794 3,681
Structures and improvements.............................................. 11,880 11,130
Other operating property................................................. 11,249 10,500
57,758 57,280
Less accumulated depreciation........................................ (25,141) (24,122)
Net operating property........................................... 32,617 33,158
Intangibles, net of accumulated amortization................................ 9,253 9,777
Other Assets................................................................ 966 688
$ 81,193 $ 77,763
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Cash overdrafts.......................................................... $ 317 $ 1,976
Line of credit borrowings................................................ 2,272 --
Accounts payable......................................................... 4,899 3,093
Current maturities of long-term debt (Note 5)............................ 15,000 300
Accrued payroll and fringes.............................................. 6,279 6,068
Other accrued expenses................................................... 4,079 3,685
Total current liabilities............................................ 32,846 15,122
Deferred Income Taxes....................................................... 1,396 1,867
Long-Term Debt (Note 5)..................................................... -- 9,700
Shareholders' Equity (Note 6)
Preferred stock with $0.01 par value, authorized 1,000,000 shares,
none outstanding..................................................... -- --
Common stock with $0.01 par value, authorized 13,000,000 shares,
issued 7,597,676 and 7,593,592 shares................................ 76 76
Paid-in capital.......................................................... 6,103 6,090
Retained earnings........................................................ 75,839 77,367
Treasury stock 4,345,561 and 3,661,220 shares, at cost................... (35,067) (32,459)
Total shareholders' equity........................................... 46,951 51,074
$ 81,193 $ 77,763
The accompanying notes to condensed consolidated balance sheets are an integral part of these statements.
<FN>
TRANSFINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(In thousands) (Unaudited)
1999 1998
Cash Flows From Operating Activities
Net income (loss)................................................... $ (1,528) $ (2,137)
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities
Depreciation and amortization..................................... 3,812 5,053
Provision for credit losses....................................... 675 1,033
Deferred income tax benefit....................................... (563) (3,047)
Other............................................................. 27 --
Net increase (decrease) from change in other
working capital items affecting operating activities........... (222) 3,459
2,201 4,361
Cash Flows From Investing Activities
Proceeds from discontinued operations............................... -- 6,345
Purchase of finance subsidiary...................................... -- (4,178)
Purchase of operating property, net................................. (2,819) (2,415)
Origination of finance accounts receivable.......................... (148,652) (117,599)
Sale of finance accounts receivable................................. 111,765 92,078
Collection of owned finance accounts receivable..................... 33,005 28,749
Purchases of short-term investments................................. -- (2,998)
Maturities of short-term investments................................ -- 6,024
Other............................................................... (233) (329)
(6,934) 5,677
Cash Flows From Financing Activities
Cash overdrafts..................................................... (1,659) --
Borrowings on long-term debt........................................ 5,000 10,000
Payments to acquire treasury stock.................................. (2,603) (18,847)
Borrowing (repayments) on line of credit agreements, net............ 2,272 (2,500)
Other............................................................... (3) (79)
3,007 (11,426)
Net Decrease in Cash and Cash Equivalents............................. (1,726) (1,388)
Cash and Cash Equivalents at beginning of period...................... 3,256 4,778
Cash and Cash Equivalents at end of period............................ $ 1,530 $ 3,390
Cash Paid During the Period for
Interest............................................................ $ 876 $ 62
Income Taxes........................................................ $ 80 $ 363
<FN>
On May 29, 1998, the Company acquired all of the capital stock of Oxford Premium Finance, Inc. ("Oxford") for approximately
$4,178,000. In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired 22,338
Cash paid for capital stock and acquisition expenses (4,178)
Intangibles 1,876
Liabilities assumed $ 20,036
In connection with the acquisition of Oxford, $19.0 million of its finance accounts receivables were sold under the securitization
agreement. The proceeds of the sale were paid directly to Oxford's former line of credit bank to repay the balance outstanding
under the line at the date of acquisition.
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
TRANSFINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands)(Unaudited)
Total
Share
Common Paid-In Retained Treasury holders'
Stock Capital Earnings Stock Equity
Balance at December 31, 1997.................. $ 75 $ 5,581 $ 79,394 $(12,565) $ 72,485
Net loss...................................... -- -- (2,027) -- (2,027)
Issuance of shares under incentive plans...... 1 509 -- (591) (81)
Purchase of 2,115,422 shares of common stock.. -- -- -- (19,303) (19,303)
Balance at December 31, 1998.................. 76 6,090 77,367 (32,459) 51,074
Net loss...................................... -- -- (l,528) -- (1,528)
Issuance of shares under incentive plans...... -- 13 -- (5) 8
Purchase of 683,241 shares of common stock.... -- -- -- (2,603) (2,603)
Balance at September 30, 1999................. $ 76 $ 6,103 $ 75,839 $(35,067) $ 46,951
<FN>
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
TRANSFINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. PRINCIPLES OF CONSOLIDATION AND SIGNIFICANT ACCOUNTING POLICIES
The unaudited condensed consolidated financial statements include
TransFinancial Holdings, Inc. ("TransFinancial") and all of its subsidiary
companies (the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation. The unaudited condensed
financial statements included herein have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission ("SEC") and have not
been examined or reviewed by independent public accountants. The year end
condensed balance sheet data was derived from audited financial statements, but
does not include all disclosures required by generally accepted accounting
principles. In the opinion of management, all adjustments necessary to fairly
present the results of operations have been made.
Pursuant to SEC rules and regulations, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
from these statements unless significant changes have taken place since the end
of the most recent fiscal year. TransFinancial believes that the disclosures
contained herein, when read in conjunction with the financial statements and
notes included in TransFinancial's Annual Report on Form 10-K, filed with the
SEC on March 15, 1999, are adequate to make the information presented not
misleading. It is suggested, therefore, that these statements be read in
conjunction with the statements and notes included in the aforementioned report
on Form 10-K.
As of July 1, 1998, the Company prospectively decreased the estimated
remaining useful life of certain purchased software to reflect the Company's
plan to substantially revise and replace the software. This change decreased
amortization expense in the third quarter and nine months of 1999 by $50,000 and
$150,000 and decreased the net loss by approximately $30,000, or $0.01 per
share, and $90,000, or $0.03 per share, for the periods. This change will
decrease amortization expense and increase operating income by approximately
$50,000 for the remainder of 1999 from amounts which would have been recorded
had the change not been made.
2. SEGMENT REPORTING
The Company operates in three business segments: transportation, financial
services, and industrial technology. Other items are shown in the table below
for purposes of reconciling to consolidated amounts.
Third Quarter Nine Months
Operating Operating Operating Operating Total
($ in thousands) Revenues Income (Loss) Revenues Income (Loss) Assets
Transportation 1999 $ 37,089 $ (1,502) $ 112,959 $(1,861) $47,863
1998 37,666 (812) 108,440 675 46,564
Financial Services 1999 2,163 333 6,352 1,113 26,685
1998 1,914 (886) 5,107 (826) 25,312
Industrial Technology 1999 -- (33) -- (127) 110
1998 -- (926) -- (1,388) 195
Total Segments 1999 39,252 (1,202) 119,311 (875) 74,658
1998 39,580 (2,624) 113,547 (1,539) 72,071
General Corporate and Other 1999 42 (157) 101 (657) 6,535
1998 34 (1,407) 105 (1,926) 7,237
Consolidated 1999 39,294 (1,359) 119,412 (1,532) 81,193
1998 39,614 (4,031) 113,652 (3,465) 79,308
<FN>
3. SUBSEQUENT EVENTS
On October 19, 1999, the Company executed a definitive agreement pursuant to
which COLA Acquisitions, Inc. ("COLA"), a company newly formed by three
TransFinancial directors, will acquire all of the Company stock not owned by
such directors for $6.03 in cash. The acquisition will be effected by a merger
of COLA into TransFinancial, and the conversion of TransFinancial shares into
cash.
Consummation of the Merger is subject to several conditions, including
completion of COLA's financing and approval of the transaction by the holders of
a majority of the outstanding Company shares.
4. ACQUISITION OF PREMIUM FINANCE SUBSIDIARY
On May 29, 1998, TransFinancial Holdings, Inc. ("TransFinancial" or "the
Company") through Universal Premium Acceptance Corporation ("UPAC"), its
insurance premium finance subsidiary, completed the acquisition of all of the
issued and outstanding stock of Oxford Premium Finance, Inc. ("Oxford") for
approximately $4.2 million. Oxford offered short-term collateralized financing
of commercial insurance premiums through approved insurance agencies in 17
states throughout the United States. At May 29, 1998, Oxford had outstanding
net finance receivables of approximately $22.5 million. This transaction was
accounted for as a purchase. UPAC sold an additional $4.2 million of its
receivables under its receivable securitization agreement to obtain funds to
consummate the purchase. Concurrently with the closing of the acquisition, UPAC
amended its receivables securitization agreement to increase the maximum
allowable amount of receivables to be sold under the agreement and to permit the
sale of Oxford's receivables under the agreement. Effective on May 29, 1998,
Oxford sold approximately $19 million of its receivables under the
securitization agreement using the proceeds to repay the balance outstanding
under its prior financing arrangement. The terms of the acquisition and the
purchase price resulted from negotiations between UPAC and Oxford Bank & Trust
Company, the former sole shareholder of Oxford. In connection with the purchase
of Oxford, TransFinancial recorded goodwill of $1.9 million which will be
amortized on the straight-line basis over 15 years.
The operating results of Oxford are included in the consolidated operating
results of TransFinancial after May 29, 1998. The pro forma consolidated
results of operations of TransFinancial for the nine months ended September 30,
1998, assuming the acquisition occurred as of the beginning of the period, were
operating revenues of $114.1 million, net loss of $2.1 million and basic and
diluted loss per share of $(0.37). The pro forma results of operations are not
necessarily indicative of the actual results that would have been obtained had
the acquisition been made at the beginning of the period, or of results which
may occur in the future.
5. FINANCING AGREEMENTS
SECURITIZATION OF RECEIVABLES
TransFinancial, UPAC and APR Funding Corporation (a wholly-owned subsidiary)
have entered into a securitization agreement with a financial institution
whereby undivided interests in a designated pool of accounts receivable can be
sold on an ongoing basis. Effective October 8, 1999, the securitization
agreement was amended to decrease the maximum allowable amount of receivables to
be sold under the agreement to $70.0 million and to change the expiration date
of the agreement from December 30, 2001 to January 15, 2000. The purchaser
permits principal collections to be reinvested in new financing agreements. The
Company had securitized receivables of $63.1 million and $64.8 million at
September 30, 1999 and 1998. The cash flows from the sale of receivables are
reported as investing activities in the accompanying consolidated statement of
cash flows. The securitized receivables are reflected as sold in the
accompanying balance sheet.
The terms of the agreement require UPAC to maintain a minimum book net worth
of $20.0 million and contain restrictions on the payment of dividends by UPAC to
TransFinancial without prior consent of the financial institution. The terms of
the agreement also require the Company to maintain a minimum consolidated
tangible net worth of $35 million and a minimum ratio of consolidated EBITDA to
interest and securitization fees of 1.5 to 1.0. The Company was in compliance
with all such provisions at September 30, 1999. The terms of the securitization
agreement also require that UPAC maintain a default reserve at specified levels
that serves as additional collateral. At September 30, 1999, approximately $7.3
million of owned finance receivables served as collateral under the default
reserve provision.
SECURED LOAN AGREEMENTS
In January 1998, Crouse Cartage Company entered into a three-year secured loan
agreement with a commercial bank which provides for a $4.5 million working
capital line of credit loan ("Working Capital Line"). The following table
summarizes activity under the Working Capital Line in the third quarter and nine
months ended September 30, 1999 and 1998 (in thousands, except percentages):
Third Quarter Nine Months
1999 1998 1999 1998
Balance outstanding at end of period $2,272 $ -- $2,272 $ --
Average amount outstanding.......... $1,703 $ -- $ 915 $ 773
Maximum month end balance outstanding $2,272 $ -- $2,414 $2,752
Interest rate at end of period...... 8.00% 8.25% 8.00% 8.25%
Weighted average interest rate...... 7.82% 8.50% 7.78% 8.50%
In September 1998, the Company entered into a two-year secured loan agreement
with the same commercial bank which enabled the Company to borrow $10.0 million
(the "Loan"), secured by freight accounts receivable and a second lien on
revenue equipment. In March 1999, the Loan was amended and restated to increase
the borrowing to $15.0 million. The Loan bears interest at 25 basis points
below the bank's prime rate. The interest rate was 8.00% at September 30, 1999.
The terms of the Loan provide for monthly payments of interest only through
September 30, 1999, with monthly principal payments thereafter of $100,000 plus
interest through maturity on September 30, 2000, when the balance outstanding
becomes due.
The terms of the Loan require the Company to maintain a minimum tangible net
worth of $35 million, a ratio of current assets to current liabilities of 1.25
to 1.00, a ratio of total liabilities to tangible net worth of 1.0 to 1.0, and
contain restrictions on the payment of dividends without prior consent of the
Lender. The Company was in compliance with all such provisions at September 30,
1999, except for the current ratio covenant and certain other covenants. The
Company received a waiver from the bank of these covenant violations. The
proceeds of the Loan were used to repurchase shares of the Company's common
stock.
6. STOCK REPURCHASE
In the first quarter of 1999, the Board of Directors authorized the repurchase
of 1,030,000 shares of the Company's common stock. Through September 30, 1999,
a total of 683,241 shares had been repurchased at a cost of approximately $2.6
million.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Third quarter ended September 30, 1999 compared to the third quarter ended
September 30, 1998 and nine months ended September 30, 1999 compared to the
nine months ended September 30, 1998.
TransFinancial operates primarily in three segments; transportation, through
its subsidiary, Crouse Cartage Company and its affiliates ("Crouse"); financial
services, through its subsidiary, UPAC; and industrial technology, through its
subsidiary, Presis.
TRANSPORTATION
Operating Revenue - The changes in transportation operating revenue are
summarized in the following table (in thousands):
Qtr. 3 1999 Nine Months 1999
vs. vs.
Qtr. 3 1998 Nine Months 1998
Increase (decrease) from:
Increase (decrease) in LTL tonnage............. (1,333) 2,443
Increase in LTL revenue per hundredweight..... 1,031 2,401
Increase (decrease) in truckload revenues...... (275) (326)
Net increase (decrease).................... (577) 4,518
Less-than-truckload ("LTL") revenues declined 0.9% from $33.3 million for the
third quarter of 1998 to $33.0 million for the third quarter of 1999. The
principal cause of the decline was a 4.0% decrease in LTL tons hauled, which
management believes is largely due to a perception of uncertainty about Crouse's
future resulting from the one day work stoppage in May 1999 by union personnel
at a key terminal and the announcements relating to the proposed management
buyout of the Company. The Company's management believes the completion of the
proposed management buyout will provide the continuity and stability necessary
to regain the lost business. The decline in revenue from reduced tons was
offset in part by a 3.1% improvement in LTL revenue yield resulting from the
Crouse's focus on yield improvement, general rate increases in November 1998 and
September 1999 and fuel surcharges imposed in August 1999 to recover the cost of
increased diesel fuel prices.
LTL revenues rose 5.1% from $95.7 million for the first nine months of 1998
to $100.6 million for the same period of 1999. A 2.6% overall increase in tons
hauled and a 2.5% improvement in revenue yield combined to provide the revenue
growth, particularly in the first six months of 1999.
Truckload operating revenues fell 6.3% from $4.3 million for the third
quarter of 1998 to $4.1 million for the third quarter of 1999 and 2.6% from
$12.7 million for the first nine months of 1998 to $12.4 million for the same
period in 1999. The decline in truckload revenues for both periods was the
result of the factors discussed above as well as the temporary closing of a meat
processing plant operated by one of Crouse's customers.
Operating Expenses - A comparative summary of transportation operating expenses
as a percent of transportation operating revenue follows:
Percent of Operating Revenue
Third Quarter Nine Months
1999 1998 1999 1998
Salaries, wages and employee benefits.................... 61.0% 58.5% 60.0% 58.3%
Operating supplies and expenses.......................... 14.3% 13.3% 13.1% 12.6%
Operating taxes and licenses............................. 3.3% 2.6% 2.8% 2.6%
Insurance and claims..................................... 4.3% 3.3% 2.9% 2.4%
Depreciation............................................. 2.9% 2.8% 2.8% 2.8%
Purchased transportation and rents....................... 18.3% 21.6% 20.9% 20.7%
Total operating expenses............................. 104.1% 102.1% 101.6% 99.4%
Crouse's operating expenses as a percentage of operating revenue, or
operating ratio, increased in each of the third quarter and the first nine
months of 1999, in relation to the comparable periods of 1998. The
deterioration in operating ratio occurred principally in three cost categories:
salaries, wages and employee benefits; operating supplies and expenses; and
insurance and claims. The above increases were in part offset by decreases in
purchased transportation and rents.
Salaries, wages and employee benefits increased 2.6% from $22.1 million for
the third quarter of 1998 to $22.6 million for the third quarter of 1999, and
7.2% from $63.2 million for the nine months of 1998 to $67.7 million for the
same period of 1999. The increase in the third quarter of 1999 was principally
the result of a scheduled increase in union wages and benefits effective April
1, 1999, pursuant to the Crouse's collective bargaining agreement.
Additionally, in the third quarter of 1999 Crouse increased its utilization of
Company drivers and tractors to provide transportation of freight between
terminals ("linehaul transportation") and decreased its utilization of owner-
operator leased equipment. The increase in salaries, wages and employee
benefits for the first nine months of 1999 was the result of the increase in
business volumes discussed above, the scheduled increase in union wages and
benefits and certain retroactive wage increases paid in connection with the
resolution of certain local union contracts.
Operating supplies and expenses increased 5.8% from $5.0 million for the
third quarter of 1998 to $5.3 million for the third quarter of 1999, and 8.5%
from $13.7 million for the first nine months of 1998 to $14.8 million for the
comparable period of 1999. The increase in the third quarter was primarily the
result of increases in diesel fuel prices, as well as the cost of relocating
certain personnel affected by changes in the Crouse's operations. The increase
for the first nine months of 1999 was result the increased business volumes
discussed previously in addition to the factors discussed above for the third
quarter.
Insurance and claims expenses rose from 3.3% to 4.3% of operating revenue for
the third quarter of 1998 and 1999, respectively, and from 2.4% to 2.9% of
operating revenue for the respective nine month periods of 1998 and 1999. The
increases in insurance and claims expenses were primarily the result of adverse
developments in the 1999 periods with respect to prior period claims.
Purchased transportation and rent, decreased 15.6% from $8.1 million for the
third quarter of 1998 to $6.9 million for the third quarter of 1999 as Crouse
decreased its utilization of owner-operator leased equipment for linehaul
transportation as discussed above.
The Company's transportation net loss for the third quarter of 1999 was
$886,000 as compared to a net loss of $484,000 for the third quarter of 1998, as
a result of the decrease in operating revenues and increases in operating
expenses discussed above. The net loss for the first nine months of 1999 was
$1,131,000 as compared to net income of $336,000 for the same period of 1998, as
a result of increases in operating expenses discussed above.
FINANCIAL SERVICES
For the third quarter of 1999, UPAC reported operating income of $333,000 on
net financial services revenue of $2.2 million, as compared to an operating loss
of $886,000 on net revenue of $1.9 million for the comparable period of 1998.
For the first nine months of 1999, UPAC reported operating income of $1,113,000
on net revenue of $6.4 million, as compared to an operating loss of $826,000 on
net revenue of $5.1 million. The increases in net financial services revenue
and operating income in the periods of 1999 were the result of increased average
total receivables outstanding, offset in part by lower average yields on finance
contracts. The growth in average total receivables was due to the acquisition
of Oxford Premium Finance, Inc. on May 29, 1998 and the addition of marketing
representatives in other key markets since the beginning of 1998. A decrease in
consulting fees in the third quarter and nine months of 1999 resulting from the
expiration, effective December 31, 1998, of a consulting agreement with the
former owner of UPAC, also contributed to the increases in operating income.
Increased provisions for credit losses in the first nine months of 1999
partially offset the improvement in revenue in the period. Operating expenses
for the third quarter and nine months of 1998 include $333,000 of additional
depreciation related to the change in estimated useful life for certain
purchased software.
UPAC reported net income of $181,000 for the third quarter of 1999, as
compared to a net loss of $535,000 for the third quarter of 1998, as a result of
increased revenues and decreased operating expenses as discussed above. UPAC's
net income for the first nine months of 1999 was $606,000 as compared to a net
loss of $491,000 for the comparable period of 1998, as a result of the factors
discussed above.
INDUSTRIAL TECHNOLOGY
In the third quarter and nine months of 1999, Presis incurred operating
expenses of $33,000 and $127,000, primarily in salaries, wages and employee
benefits, as compared to operating expenses of $926,000 and $1,388,000 for the
third quarter and nine months of 1998. Since the fourth quarter of 1998, Presis
has limited expenditures to essential activities related to continued research
and testing of its technology. The operating expenses in the periods of 1998
include charges of $244,000 relating to certain management and consulting
contracts and $525,000 resulting from the adjustment of certain equipment and
intangibles to estimated fair value.
Presis' losses, net of tax effects, were $20,000 and $78,000 for the third
quarter and nine months of 1999, as compared to $557,000 and $837,000 for the
comparable periods of 1998.
OTHER
Included in general corporate expenses of the third quarter and nine months
of 1999 are approximately $191,000 of legal, accounting and financial advisor
fees incurred in the evaluation of the proposal by certain members of management
to acquire all of the outstanding shares of the Company.
In connection with a failed takeover attempt in the third quarter of 1998,
the Company incurred $500,000 in transaction costs and expenses that are
included in general corporate expenses. Additionally, general corporate charges
of $700,000 were recorded in the third quarter of 1998, principally to reflect
certain excess costs incurred to remove contaminated soil from a site formerly
owned by the Company. A lawsuit has been filed against the environmental
engineering firm that performed the initial cleanup to recover such excess
costs. The Company has not recorded the benefit of potential recovery pursuant
to this lawsuit and none can be assured.
As a result of the Company's use of funds for the stock repurchases, interest
earnings on invested funds were substantially lower in the third quarter and
nine months of 1999 than in the same periods of 1998. Interest expense increased
in the periods of 1999 due to borrowings on long-term debt incurred to
repurchase stock and increases in interest rates on borrowings in the third
quarter of 1999.
TransFinancial's effective income tax provision (benefit) rates for the third
quarter and nine months of 1999 were (37)% and (34)%, as compared to (36)% and
(31)% for the comparable periods of 1998. The effective income tax rates for
each period were a lower percentage than the statutory rate due to the impact of
non-deductible amortization of intangibles and meals and entertainment expenses.
OUTLOOK
The Company believes the following statements may be forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, and, as such, involve risks and uncertainties which are
detailed below under the caption "Forward-Looking Statements".
The Company utilizes a three-year strategic planning process with the goal of
maximizing shareholder value through profitable growth of its business segments.
In the transportation segment the plan calls for the Company to continue to
provide and improve upon its already superior service to its customers in its
primary operating territory, while increasing the density of its operations in
the eastern portion of its service area. The Company also intends to continue
to focus on improving the efficiency and effectiveness of its operations.
The Financial services segment will focus on targeting its marketing efforts
to improve its contribution to the Company's return on equity. Additionally,
the Company intends to focus on utilizing technology to improve its operating
efficiency.
The industrial technology operation will focus on continued research, testing
and commercialization of its technology. The Company expects this operation to
incur operating losses in the remainder of 1999 at or below expenditure levels
of $100,000 per quarter.
FORWARD-LOOKING STATEMENTS
The Company believes certain statements contained in this Quarterly Report on
Form 10-Q which are not statements of historical fact may constitute forward-
looking statements within the meaning of Section 21E of the Securities Exchange
Act of 1934, as amended, including, without limitation, the statements
specifically identified as forward-looking statements in this Form 10-Q. These
statements can often be identified by the use in such statements of forward-
looking terminology, such as "believes," "expects," "may," "will," "should,"
"could," "intends," "plans," "estimates," or "anticipates," or the negative
thereof, or comparable terminology. Certain of such statements contained herein
are marked by an asterisk ("*") or otherwise specifically identified herein. In
addition, the Company believes certain statements in future filings by the
Company with the Securities and Exchange Commission, in the Company's press
releases, and in oral statements made by or with the approval of an authorized
executive officer of the Company which are not statements of historical fact may
constitute forward-looking statements within the meaning of the Act. Examples
of forward-looking statements include, but are not limited to (i) projections of
revenues, income or loss, earnings or loss per share, capital expenditures, the
payment or non-payment of dividends, capital structure and other financial
items, (ii) statements of plans and objectives of the Company or its management
or Board of Directors, including plans or objectives relating to the products or
services of the Company, (iii) statements of future economic performance, and
(iv) statements of assumptions underlying the statements described in (i), (ii)
and (iii). These forward-looking statements involve risks and uncertainties
which may cause actual results to differ materially from those anticipated in
such statements. The following discussion identifies certain important factors
that could affect the Company's actual results and actions and could cause such
results or actions to differ materially from any forward-looking statements made
by or on behalf of the Company that relate to such results or actions. Other
factors, which are not identified herein, could also have such an effect.
TRANSPORTATION
Certain specific factors which may affect the Company's transportation
operation include: competition from other regional and national carriers for
freight in the Company's primary operating territory; price pressure; changes in
fuel prices; labor matters, including changes in labor costs, and other labor
contract issues; and environmental matters.
FINANCIAL SERVICES
Certain specific factors which may affect the Company's financial services
operation include: the performance of financial markets and interest rates; the
performance of the insurance industry; competition from other premium finance
companies and insurance carriers for finance business in the Company's key
operating states; adverse changes in statutory interest rates or other
regulations in states in which the Company operates; greater than expected
credit losses; the acquisition and integration of additional premium finance
operations or receivables portfolios; and the inability to obtain continued
financing at a competitive cost of funds.
INDUSTRIAL TECHNOLOGY
Presis is a start-up business formed to develop an industrial technology for
dry particle processing. This technology is subject to risks and uncertainties
in addition to those generally applicable to the Company's operations described
herein. These additional risks and uncertainties include the efficacy and
commercial viability of the technology, the ability of the venture to market the
technology, the acceptance of such technology in the marketplace, the general
tendency of large corporations to be slow to change from known technology, the
ability to protect its proprietary information in the technology and potential
future competition from third parties developing equivalent or superior
technology. As a result of these and other risks and uncertainties, the future
results of operations of the venture are difficult to predict, and such results
may be materially better or worse than expected or projected.
OTHER MATTERS
With respect to statements in this Report which relate to the current
intentions of the Company and its subsidiaries or of management of the Company
and its subsidiaries, such statements are subject to change by management at any
time without notice.
With respect to statements in "Financial Condition" regarding the adequacy of
the Company's capital resources, such statements are subject to a number of
risks and uncertainties including, without limitation: the future economic
performance of the Company (which is dependent in part upon the factors
described above); the ability of the Company and its subsidiaries to comply with
the covenants contained in the financing agreements; future acquisitions of
other businesses not currently anticipated by management of the Company; and
other material expenditures not currently anticipated by management.
The proposed management buyout of the Company is subject to a number of
conditions, including the completion of financing by COLA and approval of the
transaction by the holders of a majority of outstanding shares of Common Stock
of the Company. There can be no assurance that all of the conditions to the
consummation of the transaction will be satisfied.
With respect to statements in "Financial Condition" regarding the Company's
intention to refinance, extend or replace certain financing arrangements, the
Company's ability to do so is subject to a number of risks and uncertainties,
including, without limitation, the future economic performance of the Company,
the ability of the Company to comply with the terms of such financing
arrangements, general conditions in the credit markets and the availability of
credit to the Company on acceptable terms.
GENERAL FACTORS
Certain general factors that could impact any or all of the Company's
operations include: changes in general business and economic conditions; changes
in governmental regulation; and tax changes. Expansion of these businesses into
new states or markets is substantially dependent on obtaining sufficient
business volumes from existing and new customers in these new markets at
compensatory rates.
The cautionary statements made pursuant to Section 21E of the Securities
Exchange Act of 1934, as amended, are made as of the date of this Report and are
subject to change. The cautionary statements set forth in this Report are not
intended to cover all of the factors that may affect the Company's businesses in
the future. Forward-looking information disseminated publicly by the Company
following the date of this Report may be subject to additional factors hereafter
published by the Company.
FINANCIAL CONDITION
As of September 30, 1999, the Company's net working capital was $5.5 million
as compared to $19.0 million as of December 31, 1998. The Company's current
ratio was 1.2 and its ratio of total liabilities to tangible net worth was 0.9
as of September 30, 1999, as compared to a current ratio of 2.3 and a ratio of
total liabilities to tangible net worth of 0.7 as of December 31, 1998. The
decrease in working capital and current ratio was the result of the
reclassification of the Company's $15.0 million term loan as current maturities
of long-term debt as discussed below. A substantial amount of the Company's
cash is generated from operating activities. Cash generated from operating
activities decreased in the nine months ended September 30, 1999 as compared to
the nine months ended September 30, 1998, due primarily to an increase in
freight accounts receivable resulting from decreased productivity as Crouse's
relocated its administrative office. The Company expects this administrative
issue to be corrected by December 31, 1999.* The Company believes that cash
generated from operating activities, together with funds available under
financing agreements discussed below, will be sufficient to meet the Company's
short-term and long-term cash requirements.*
A substantial portion of the capital required for UPAC's insurance premium
finance operations has been provided through the sale of undivided interests in
a designated pool of receivables on an ongoing basis under a receivables
securitization agreement. The current securitization agreement provides for the
sale of a maximum of $70.0 million of eligible receivables. As of September 30,
1999, $63.1 million of such receivables had been securitized. The
securitization agreement expires January 15, 2000. The Company intends to
negotiate an extension or replacement of this agreement prior to its expiration,
although there can be no assurance that the Company will be successful. Failure
to extend or replace the current securitization agreement would likely have a
material adverse effect on the Company's business, financial condition and
results of operations.*
Crouse has a three-year secured loan agreement with a commercial bank that
provides for a $4.5 million working capital line of credit loan, ("Working
Capital Line"). Borrowings on the Working Capital Line bear interest at 25
basis points below the bank's prime rate. The interest rate was 8.00% at
September 30, 1999. As of September 30, 1999, borrowings of $2,272,000 were
outstanding under the Working Capital Line. Crouse's banking arrangements with
its primary bank provide for automatic borrowing under the Working Capital Line
to cover checks presented in excess of collected funds. On certain occasions
the timing of cash disbursements and cash collections results in a net cash
overdraft. The outstanding checks representing such overdrafts are generally
funded from the next days cash collections, or if not sufficient, from
borrowings on the Working Capital Line.
In September 1998, the Company entered into a two-year secured loan agreement
with the same commercial bank to borrow $10.0 million (the "Loan"). Freight
accounts receivable and a second lien on revenue equipment are pledged as
collateral for the Loan. In March 1998, the Company amended and restated this
agreement increasing the borrowings to $15 million. The Loan bears interest at
25 basis points below the bank's prime rate. The interest rate was 8.00% at
September 30, 1999. The terms of the Loan provide for monthly payments of
interest only through September 30, 1999, with monthly principal payments
thereafter on $100,000 plus interest through maturity on September 30, 2000. At
September 30, 1999 the entire $15 million term loan was classified as current
maturities of long-term debt. In the event the management buyout transaction is
approved by shareholders and becomes effective, this term loan would be replaced
with a new debt agreement including a new principal maturity schedule. If the
management buyout transaction is not completed, the Company intends to negotiate
a new principal maturity schedule prior to September 30, 2000, although there
can be no assurance that Company would be successful. Failure to replace the
term loan or negotiate a new principal maturity schedule would likely have a
material adverse effect on the Company's business, financial condition and
results of operations.*
In the first quarter of 1999, the Board of Directors authorized the repurchase
of 1,030,000 shares of the Company's common stock. Through September 30, 1999,
a total of 683,241 shares had been repurchased at a cost of $2.6 million.
YEAR 2000 ISSUES
The Year 2000 Issue is the result of computer programs being written using two
digits to represent years rather than four digits, which include the century
designation. Without corrective action, it is possible that the Company's
computer programs, or its major service providers, vendors, suppliers, partners
or customers that have date-sensitive software could recognize a date using "00"
as the year 1900 rather than the year 2000. Additionally, certain other assets
may contain embedded chips that include date functions that could be affected by
the transition to the year 2000. In some systems this could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company has developed and is executing a Year 2000 Compliance Strategic
Plan ("Year 2000 Plan") to enable management of TransFinancial Holdings, Inc.
and each of its business operations to ensure that each of its critical business
systems are "Year 2000 Compliant". The Company considers a business system to
be Year 2000 Compliant if it is able to transition into the year 2000 without
significant disruption to the Company's internal operations or those of its key
business partners. The Year 2000 Plan encompasses the Company's information
technology assets, including computer hardware and software ("IT assets") and
non-information technology assets, goods and services, including assets
utilizing embedded chip technology and significant customer and vendor
relationships ("non-IT assets").
The Company's Year 2000 Plan includes three principal sections: (1) mainframe
computer and personal computer hardware and software utilized by the Company's
transportation operations ("Transportation IT assets"); (2) desktop computer
applications, embedded chips, significant business partners of the
transportation operations ("Transportation non-IT assets"); and (3) personal
computer hardware and software, desktop computer applications, embedded chips,
significant business partners of the financial services operations ("Financial
Services IT and non-IT assets"). The general phases common to all sections are:
(1) inventorying, assessing and assigning priorities to Year 2000 items
("Inventory Phase"); (2) taking corrective actions to modify, repair or replace
items that are determined not to be Year 2000 Compliant ("Corrective Action
Phase"); (3) testing material items ("Testing Phase"); and (4) developing and
implementing contingency plans for each organization and location ("Contingency
Planning Phase"). The Company intends to utilize primarily internal personnel
and resources to execute its Year 2000 Plan but may utilize external consultants
as needed in certain phases.
TRANSPORTATION IT ASSETS
With regard to the Transportation IT assets section, the Inventory Phase is
completed. The Company has identified its computer applications, programs and
hardware and is in the processing of assessing the Year 2000 risk associated
with each item. The Company executed the Corrective Action Phase by modifying
or upgrading items that were not Year 2000 compliant. This phase was completed
in the third quarter of 1999. The Testing Phase was ongoing as corrective
actions were completed. The Testing Phase was substantially completed in the
third quarter of 1999, although further testing and verification will continue
throughout 1999.*
TRANSPORTATION NON-IT ASSETS
With regard to the Transportation non-IT assets section, the Inventory Phase
is completed. The Company identified assets that may contain embedded chip
technologies and contacted the related vendors to gain assurance of Year 2000
status on each item. The Company also identified its significant business
relationships and contacted key vendors, suppliers and customers to attempt to
reasonably determine their Year 2000 status. The Corrective Action Phase was
substantially completed the third quarter of 1999.* The Testing Phase was
ongoing as corrective actions were completed. This phase was substantially
completed by the end of third quarter of 1999, although further testing and
verification will continue throughout 1999.*
FINANCIAL SERVICES IT AND NON-IT ASSETS
With regard to the Financial Services IT and non-IT assets section, the
Inventory Phase is completed. The Company identified its computer applications,
programs and hardware and non-IT assets and assessed the Year 2000 risk
associated with each item. The Company also identified its significant business
relationships and contacted key vendors, suppliers and customers to attempt to
reasonably determine their Year 2000 status. The Company has completed the
Corrective Action Phase. The Company's financial services database, operating
systems and computer applications have been upgraded or modified to address the
Year 2000. The Testing Phase was ongoing as corrections were made and was
substantially complete in the fourth quarter of 1998. Certain testing of bank
and other interfaces was completed in the first quarter of 1999.
The Company has been contacting business partners whose Year 2000 non-
compliance could adversely affect the Company's operations, employees, or
customers. The Company's transportation and financial services businesses are
dependent on telecommunication, financial and utility services provided by a
number of entities. The Company has received written assurances from
substantially all of its material business partners that they will be compliant.
The Company has developed contingency plans to address potential Year 2000
scenarios that may arise with significant business partners. The Company
believes the most likely worst case scenario would be the failure of a material
business partner to be Year 2000 compliant.* Therefore, the Company will
continue to work with and monitor the progress of its partners and formulate
additional contingency plans when the Company does not believe any business
partner will be compliant.*
COSTS
It is currently estimated that the aggregate cost of the Company's Year 2000
efforts will be approximately $150,000 to $200,000, of which approximately
$145,000 has been spent.* These costs are being expensed as they are incurred
and are being funded out of operating cash flow. These amounts do not include
approximately $25,000 of costs capitalized as the Company replaced certain non-
IT assets, in part to address the Year 2000 issue, as part of the Company's
normal capital replacement and upgrades. These amounts also do not include any
internal costs associated with the development and implementation of contingency
plans, which are not expected to be material.*
RISKS
The failure to correct a material Year 2000 issue could result in an
interruption in, or failure of, certain normal business operations. Such
failures could materially and adversely affect the Company's results of
operations, liquidity and financial condition. Due to the general uncertainty
inherent in the Year 2000 issue, resulting in part from the uncertainty of the
Year 2000 readiness of third-party vendors, suppliers and customers, the Company
is unable to determine at this time whether the consequences of Year 2000
failures will have a material impact on the Company's results of operations,
liquidity and financial condition. The Company's Year 2000 Plan is designed to
gather information concerning Year 2000 issues facing the Company and to address
and resolve such issues to the extent reasonably possible. Even if the Company
successfully implements its Year 2000 Plan, there can be no assurance that the
Company's operations will not be affected by Year 2000 failures or that such
failures will not have a material adverse effect on the Company's results of
operations, liquidity and financial condition.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings -- The Company and Crouse have been named as
defendants in two lawsuits arising out of a motor vehicle accident. The first
suit was instituted on June 16, 1999 in the United States District Court in the
Eastern District of Michigan (Northern Division) by Kimberly Idalski, Personal
Representative of the Estate of Lori Cothran, Deceased against the Company and
Crouse. The second suit was instituted on August 17, 1999 in the United States
District Court in the Eastern District of Michigan (Northern Division) by Jeanne
Cothran, as Legal Guardian, on behalf of Kaleb Cothran, an infant child against
the Company and Crouse. The suits allege that the Company and Crouse
negligently caused the death of Lori Cothran in a motor vehicle accident
involving a Crouse driver. The first suit seeks damages in excess of
$50,000,000, plus costs, interest and attorney fees. The second suit seeks
damages in excess of $100,000,000, plus costs, interest and attorney fees. The
Company believes that it has meritorious defenses to the claims against the
Company and is currently investigating the claims against Crouse.
Item 2. Changes in Securities -- None
Item 3. Defaults Upon Senior Securities -- None
Item 4. Submission of Matters to Vote of Security Holders -- None
Item 5. Other Information -- None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2* Agreement and Plan of Merger Between TransFinancial Holdings, Inc.
and COLA Acquisitions, Inc.,dated as of October 19, 1999.
10.1* Amendment No. 8 to Receivables Purchase Agreement by and among
APR Funding Corporation, Universal Premium Acceptance Corporation,
TransFinancial Holdings, Inc., EagleFunding Corporation and BankBoston, N.A.,
dated October 8, 1999.
10.2* Supplemental Benefit and Collateral Assignment Split-Dollar
Agreement dated January 18, 1997 by and between the Company and Timothy P.
O'Neil.
10.3* Employment Agreement dated July 2, 1998 by and between the
Company and Timothy P. O'Neil.
10.4* Supplemental Benefit Agreement dated September 30, 1995 by and
between the Company and David D. Taggart.
10.5* Employment Agreement dated April 27, 1998 by and among the
Company, Crouse Cartage Company and David D. Taggart.
10.6* Agreement dated September 30, 1995 by and between the Company and
David D. Taggart.
10.7* Amended and Restated Employment Agreement dated October 16, 1998
by and among the Company, Universal Premium Acceptance Corporation, Presis,
L.L.C. and Kurt W. Huffman.
10.8* Agreement dated April 30, 1998 by and between the Company and
Mark A. Foltz.
10.9* Form of Indemnification Agreement between Company and officers.
10.10* Form of Indemnification Agreement between Company and directors.
27* Financial Data Schedule.
99.1 Press Release of TransFinancial Holdings, Inc. dated October 19,
1999.
* Filed herewith.
(b) Reports on Form 8-K - None
(SIGNATURE)
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.
TransFinancial Holdings, Inc.
Registrant
By: /s/ Timothy P. O'Neil
Timothy P. O'Neil, President &
Chief Executive Officer
(Principal executive officer)
By: /s/ Mark A. Foltz
Mark A. Foltz
Vice President, Finance and
Secretary
(Principal financial officer)
Date: October 27, 1999
EXHIBIT INDEX
Assigned
Exhibit
Number Description of Exhibit
2 Agreement and Plan of Merger Between TransFinancial Holdings, Inc.
and COLA Acquisitions, Inc., dated as of October 19, 1999.
10.1 Amendment No. 8 to Receivables Purchase Agreement by and among APR
Funding Corporation, Universal Premium Acceptance Corporation, TransFinancial
Holdings, Inc., EagleFunding Corporation and BankBoston, N.A., dated October 8,
1999.
10.2 Supplemental Benefit and Collateral Assignment Split-Dollar Agreement
dated January 18, 1997 by and between the Company and Timothy P. O'Neil.
10.3 Employment Agreement dated July 2, 1998 by and between the Company
and Timothy P. O'Neil.
10.4 Supplemental Benefit Agreement dated September 30, 1995 by and
between the Company and David D. Taggart.
10.5 Employment Agreement dated April 27, 1998 by and among the Company,
Crouse Cartage Company and David D. Taggart.
10.6 Agreement dated September 30, 1995 by and between the Company and
David D. Taggart.
10.7 Amended and Restated Employment Agreement dated October 16, 1998 by
and among the Company, Universal Premium Acceptance Corporation, Presis, L.L.C.
and Kurt W. Huffman.
10.8 Agreement dated April 30, 1998 by and between the Company and Mark A.
Foltz.
10.9 Form of Indemnification Agreement between Company and officers.
10.10 Form of Indemnification Agreement between Company and directors.
27 Financial Data Schedule.
99.1 Press Release of TransFinancial Holdings, Inc. dated October 19,
1999.