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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(AS FILED VIA EDGAR ON APRIL 14, 2000)
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
---------------------- ----------------------
COMMISSION FILE NUMBER 0-14060
INTRENET, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
INDIANA 35-1597565
(State or other jurisdiction of (I.R.S. Employer
Identification No.)
incorporation or organization)
400 TECHNECENTER DRIVE, SUITE 200
MILFORD, OHIO 45150
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (513) 576-6666
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, WITHOUT PAR VALUE
(Title of class)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the common stock (based upon the closing sale
price on such date) held by non-affiliates of the registrant as of March 1,
2000, was approximately $27,314,098.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS) Indicate the number of shares
outstanding of each of the registrant's classes of common stock, as of the
latest practicable date. As of March 1, 2000, there were 13,872,066 shares
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the following
documents have been incorporated by reference into this report:
Parts of Form 10 - K into
Identity of Document Which Document is Incorporated
-------------------- ------------------------------
Proxy Statement to be filed for the 2000 Part III
Annual Meeting of Shareholders of Registrant
Page 1 of 26 pages
Excluding Exhibits
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INTRENET, INC.
1999 Annual Report on Form 10-K
Table of Contents
PART I
PAGE
----
Item 1. Business 3
Item 2. Properties 6
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 7
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 13
Item 8. Financial Statements and Supplementary Data 13
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures 14
PART III
Item 10. Directors and Executive Officers of the Registrant 14
Item 11. Executive Compensation 14
Item 12. Security Ownership of Certain Beneficial Owners and Management 14
Item 13. Certain Relationships and Related Transactions 14
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 14
Signatures 15
Index to Exhibits 16
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PART I
ITEM 1. BUSINESS.
GENERAL
The Company was incorporated in 1983 under the laws of the State of
Indiana, as a holding company for truckload carrier subsidiaries. The Company
owns, directly or indirectly, 100% of four licensed truckload carriers and a
brokerage logistics operation (the operating subsidiaries), which provide
general and specialized regional truckload carrier services throughout North
America. The operating subsidiaries are Roadrunner Trucking, Inc., (RRT); Eck
Miller Transportation Corporation, (EMT); Advanced Distribution System, Inc.,
(ADS); Roadrunner Distribution Services, Inc., (RDS); and INET Logistics, Inc.,
(INL). In addition, the Company owns an intercompany employee leasing subsidiary
and an inactive Bermuda captive-insurance subsidiary.
The Company's operating subsidiaries presently operate more than 2,400
tractors, including tractors provided by owner-operators. All of the Company's
truckload carriers rely to some extent upon a network of commissioned agents and
independent contractors who own and operate tractors and trailers. All of the
Company's truckload carriers also use company-operated equipment. In 1999, the
Company's fleet traveled over 176 million revenue miles delivering approximately
344,000 loads for Company customers. The Company also brokered approximately
33,000 loads to other carriers. No customer accounted for more than 5% of the
Company's revenue in 1999.
The Company's executive offices are located at 400 TechneCenter Drive,
Suite 200, Milford, Ohio 45150 and its telephone number is (513) 576-6666.
Except as otherwise indicated by the context, the term Company, as used herein,
means Intrenet, Inc. and its consolidated subsidiaries.
OPERATING SUBSIDIARIES
Select operating statistics as of December 31, 1999, are as follows:
RRT EMT ADS RDS TOTAL
--- --- --- --- -----
Company Tractors 580 374 172 188 1,314
Owner-Operators 197 417 419 93 1,126
--- --- --- -- -----
Total Tractors 777 791 591 281 2,440
=== === === === =====
Company Trailers 1,223 474 309 531 2,537
Drivers in Tractors 568 345 149 188 1,250
Total Employees 795 531 272 214 1,836
Sales Agents 31 157 223 9 420
Avg. Length of Haul 570 360 542 1,141 512
miles miles miles miles miles
ROADRUNNER TRUCKING, INC. RRT is a truckload carrier transporting a wide
variety of general commodities, including machinery, building materials, steel,
paper, cable and wire. RRT's primary traffic flows are in the western two-thirds
of the United States where it operates one of the largest fleets of flatbed
trailers in its market area. RRT services Mexico through El Paso, TX and
Nogales, AZ, and has three large logistics and dedicated fleets operating both
flatbed and dry van trailers as well as regional operations. RRT also operates a
nationwide freight brokerage business. RRT is a New Mexico corporation,
headquartered in Albuquerque, New Mexico.
ECK MILLER TRANSPORTATION CORPORATION. EMT is a specialized truckload
carrier operating a nationwide service system of nearly 800 tractors pulling
sided flatbed and heavy-haul trailers, as well as containers. EMT primarily
transports processed metal, building materials and machinery over lanes
radiating from the midwest to all other regions of the United States. EMT is an
Indiana corporation, headquartered in Rockport, Indiana.
EMT operates a fleet of company-operated and owner-operator tractors. Most
of its 160 field offices are operated by commissioned sales agents.
ADVANCED DISTRIBUTION SYSTEM, INC. ADS is a truckload carrier that
transports general commodity freight, including iron, steel, pipe, heavy
machinery and building products, throughout the United States and Canada on
flatbed trailers and dry vans. ADS is a Florida corporation, headquartered in
Columbus, Ohio.
ADS is primarily dependent upon commissioned agents as sources for
business. ADS also operates a fleet of company-operated and owner-operated
equipment.
ROADRUNNER DISTRIBUTION SERVICES, INC. RDS is a truckload van carrier that
transports a wide variety of general commodities, including electronics, auto
parts, sportswear and consumer goods throughout service lanes in the Central and
Southwestern regions of the United States. RDS operates a nationwide freight
brokerage business, and services customers in Mexico through El Paso, TX and
Nogales, AZ. RDS is a Texas corporation, headquartered in Albuquerque, New
Mexico.
INET LOGISTICS, INC. INL is a freight broker and logistics management
company that arranges the shipment of various commodities for its customers. INL
books and coordinates transportation services with various transportation
providers, offering a cost efficient and service effective alternative to
customers. INL is an Indiana corporation, which is now headquartered in Denver,
CO.
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COMMISSIONED SALES AGENTS AND OWNER-OPERATORS
The commissioned agents and independent owner-operators used by the
operating subsidiaries, generally do not have long-term contractual agreements.
Working relationships with such persons are dependent upon mutually beneficial
characteristics including confidence in service levels, support in customer
relations, compensation levels and systems and opportunities for growth. Many of
the Company's agreements with commissioned agents are non-exclusive. The
operating subsidiaries will cancel working relationships, at any time, with
agents and owner-operators for lack of confidence in, but not limited to, those
characteristics listed above.
From time to time, various legislative or regulatory proposals are
introduced at the federal or state levels to change the employment status of
independent contractors to treat them as employees for either employment tax
purposes or for other benefits available to Company employees. Currently,
individuals are classified as employees or independent contractors for
employment tax purposes, based on contractual relationships and industry
practice.
Although management is unaware of any proposals currently pending to change
the employee/independent contractor classification, the costs associated with
potential changes, if any, could adversely affect the Company's results of
operations if the Company were unable to reflect them in its fee arrangements
with its independent owner-operators and commissioned agents, or in the prices
paid by its customers.
REVENUE EQUIPMENT
At December 31, 1999, the Company owned or leased 1,314 tractors, 1,890
flatbed trailers, and 647 dry van trailers. The following is a summary of
Company operated revenue equipment at December 31, 1999:
TRAILERS
---------------------
TRACTORS FLATBED DRY VAN
-------- ------- -------
Model year
prior to 1997 97 1,145 575
1997 107 308 37
1998 326 147 -
1999 535 152 -
2000 249 138 35
----- ----- ---
1,314 1,890 647
====== ===== ====
In addition, at the same date, owner-operators under contract provided 1,126
tractors for Company operations.
The Company has plans to acquire approximately 300 tractors in 2000, of
which approximately 270 will replace older tractors under a tractor swap
agreement. The agreement allows the Company to turn-in tractors after the
completion of the 36th month of a 48 month lease, with new replacement tractors
scheduled to arrive in mid 2000. The new tractors are expected to be financed
primarily under operating leases.
EMPLOYEES
At December 31, 1999, the Company employed 1,836 individuals, of whom 1,325
were qualified drivers, which includes mechanics, students and terminal
personnel qualified to operate tractors. Management considers its relationship
with employees to be good. None of the Company's employees are represented by a
collective bargaining unit.
COMPETITION AND AVAILABILITY OF DRIVERS
The trucking industry is characterized by intense competition, resulting
from the presence of many carriers in the market, low barriers to entry, and the
commodity nature of the services provided by many carriers. The Company competes
with other irregular route, long-haul carriers and, to a lesser extent, with
medium-haul carriers, railroads, less-than-truckload carriers, freight brokers
and proprietary transportation systems. The Federal Aviation Administration
Authorization Act of 1994 (the FAA Act), effective January 1, 1995, preempted
certain state and local laws regulating the prices, routes, or services of motor
carriers, thereby deregulating intra-state transport, and increasing competitive
conditions.
At December 31, 1999, the Company employed 1,325 qualified drivers, of
which approximately 1,250 were operating units over the road. Drivers are
selected in accordance with specific guidelines, relating primarily to safety
records, driving experience, personal evaluations, a physical examination and
mandatory drug testing. All drivers attend orientation programs and ongoing
driver efficiency and safety programs.
Competition for drivers is intense in the trucking industry, and the
Company has at times experienced difficulty attracting and retaining a
sufficient number of qualified drivers. Management believes the Company's
ability to avoid severe driver shortages results from specific measures it takes
to attract and retain highly qualified drivers. These measures include
purchasing or leasing premium quality tractors equipped with comfort and safety
features, allowing the driver to return home on a average of once every two to
three weeks, and extending participation in the Company's 401(k) profit sharing
plan and health insurance plan. Drivers are compensated on the basis of miles
driven and number of stops and deliveries made, plus bonuses relating to
performance, fuel efficiency and compliance with the Company's safety policies.
The Company continually evaluates driver compensation in order to further
enhance its ability to retain and attract sufficient qualified drivers. None of
the Company's drivers is represented by a collective bargaining unit.
REGULATION
Each of the operating subsidiaries that is a motor carrier is regulated by
various federal and state agencies. Effective January 1, 1996, the ICC
Termination Act of 1995 (the Act) abolished the Interstate Commerce Commission
(ICC) and established within the Department of Transportation (DOT) the Surface
Transportation Board.
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The Surface Transportation Board performs a number of functions previously
performed by the ICC. The Act eliminates most tariff filings and rate
regulation, but retains most other regulations issued by the ICC, until modified
or terminated by the Surface Transportation Board.
Each of the motor carrier operating subsidiaries is subject to safety
requirements prescribed by the DOT. Such matters as weight and dimension of
equipment are also subject to federal and state regulations. All of the
Company's drivers are required to obtain national commercial driver's licenses
pursuant to the regulations promulgated by the DOT. Also, DOT regulations impose
mandatory drug and alcohol testing of drivers. Each of the motor carrier
operating subsidiaries has a satisfactory safety rating with the DOT.
"Satisfactory" is DOT's highest rating.
The trucking industry is subject to possible regulatory and legislative
changes (such as increasingly stringent environmental regulations or limits on
vehicle weight and size) that may affect the economics of the industry by
requiring changes in operating practices or by changing the demand for common or
contract carrier services or the cost of providing truckload services. These
future regulations may unfavorably affect the Company's operations.
RISK MANAGEMENT AND INSURANCE
The Company's risk management programs provide protection of its assets and
interests through a combination of insurance and self-insurance. The Company
maintains both primary and excess auto liability insurance with limits and
deductibles currently at $250,000 and in amounts management believes to be
adequate.
Workers' compensation and employer's liability exposure is covered by a
large-deductible insurance policy and state workers' compensation funds.
Coverage is for statutory limits, with deductibles generally for the first
$100,000 of exposure. Prior to October 1, 1999, the liability exposure was
covered by a combination of large-deductible insurance policies, a state
approved self-insurance program, state workers' compensation funds, and a
self-insured ERISA accident indemnity plan. Coverage consisted of statutory
limits with deductibles for the first $250,000.
The Company also maintains insurance with varying deductibles for cargo,
property, physical damage and other exposures.
FUEL
As part of the Company's ongoing program to reduce fuel costs, drivers are
required to refuel at one of the Company's bulk fuel storage facilities whenever
possible. When impractical to fuel at a Company location, drivers purchase fuel
with a Company credit card at pre-authorized truckstops and fueling locations.
Shortages of fuel, increases in fuel prices, which have been prevalent in
late 1999 and early 2000, or rationing of petroleum products could have a
material adverse effect on the trucking industry, including the Company. In the
past, sharp increases in fuel prices have been partially recovered from
customers through increased rates or surcharges. However, there can be no
assurance that the Company will be able to recover increased fuel costs and fuel
taxes through increased rates in the future. The Company does not presently
hedge its future fuel purchase requirements.
The Company's fuel storage facilities are subject to environmental
regulatory requirements of the U.S. Environmental Protection Agency which
imposes standards and requirements for regulation of underground storage tanks
of petroleum and certain other substances, and by state law. Management believes
that it is in compliance with such requirements that are applicable to tanks it
owns or operates, and believes that future compliance-related expenditures, in
the aggregate, will not be material to the Company's financial or competitive
position.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward looking statements. Certain information in Items 1, 3, and 7
of this report include information that is forward looking, such as the
Company's reliance on commissioned agents and owner-operators, its exposure to
increased fuel prices, its anticipated liquidity and capital requirements and
the expected impact of legal proceedings. The matters referred to in these
forward looking statements could be affected by the risks and uncertainties
involved in the Company's business and in the trucking industry. These risks and
uncertainties include, but are not limited to, the effect of general economic
and market conditions, including downturns in customers' business cycles, the
availability and cost of qualified drivers, the availability and price of diesel
fuel, the impact and cost of government regulations and taxes on the operations
of the business, competition, as well as certain other risks described in this
report. Subsequent written and oral forward looking statements attributable to
the Company or persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements in this paragraph and elsewhere in this
report.
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ITEM 2. PROPERTIES.
The Company leases its headquarters facility, which consists of
approximately 4,000 square feet of office space. The lease provides for rent at
approximately $5,400 per month and is presently in the second year of its
five-year lease renewal expiring in August, 2003.
The following table provides information concerning other significant
properties owned or leased by the operating subsidiaries.
OWNED
OPERATING TYPE OF OR APPROXIMATE
LOCATION SUBSIDIARY FACILITY LEASED ACREAGE
-------- ---------- -------- ------ -------
Albuquerque, NM RRT Company Headquarters, Owned 15
Terminal, Maintenance
Facility and Bulk Fueling
Station
Dallas, TX RRT Terminal Leased 5
Houston, TX RRT Terminal Leased 5
Vinton, TX RRT Terminal, Maintenance Leased 4
Facility and Bulk Fueling
Station
Kingman, AZ RRT Terminal Owned 4
Phoenix, AZ RRT Terminal Leased 3
Snowflake, AZ RRT Terminal and Bulk Fueling Leased 1
Station
Fontana, CA RRT Terminal and Bulk Fueling Leased 4
Station
Indianapolis, IN RDS Terminal Leased 1
El Paso, TX RDS Terminal, Maintenance Owned 4
Facility and Bulk Fueling
Station
Rockport, IN EMT Company Headquarters, Owned 13
Terminal, Maintenance
Facility and Bulk Fueling
Station
Columbus, OH ADS Company Headquarters Leased 2
Amlin, OH ADS Maintenance Facility Leased 2
Denver, CO INL Company Headquarters Leased -
All properties owned by the Company and the operating subsidiaries are
subject to liens in favor of the Company's primary lender or independent
mortgage lenders. See Note 2 of Notes to Consolidated Financial Statements.
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ITEM 3. LEGAL PROCEEDINGS.
The Company's subsidiary, RDS, was a defendant in an action brought on
March 20, 1997, in the 327th District Court, El Paso, Texas, by a former
employee. The plaintiff alleged that he was injured as a result of the
negligence and gross negligence of RDS and received discriminatory treatment in
violation of the Texas Health and Safety Code. On March 13, 1998, a default
judgment was entered against RDS in the approximate amount of $1.0 million,
representing damages for medical expenses, loss of wage earning capacity,
physical pain and mental anguish, physical impairment, disfigurement and
punitive damages. RDS filed an appeal to the 8th Circuit Court of Appeals in El
Paso, Texas and on July 29, 1999, the 8th Circuit Court of Appeals in El Paso
issued a favorable ruling for RDS, reversing the default judgment and remanding
the case for trial. Management believes that this action should not have a
material adverse effect on the Company's liquidity, results of operations or
financial condition.
There are no other material pending legal proceedings to which the Company
or any of its subsidiaries is a party or of which any of their property is the
subject, other than routine litigation incidental to its business, primarily
involving claims for personal injury and property damage incurred in the
transportation of freight. The Company maintains insurance which covers
liability resulting from such transportation related claims in amounts customary
for the industry and which management believes to be adequate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of the Company
during the three months ended December 31, 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT.
Pursuant to federal Instruction G(3) of Form 10-K and Instruction 3 to Item
401(b) of Regulation S-K, the following information is included in lieu of being
included in the Proxy Statement for its Annual Meeting of Stockholders:
Certain information concerning the executive officers of the Company is set
forth below.
NAME AND POSITION AGE
Eric C. Jackson 53
President and Chief Executive Officer
John P. Chandler 56
Executive Vice President and
Chief Operating Officer
Thomas J. Bell 53
Executive Vice President
Chief Financial Officer,
Secretary and Treasurer
Officers of the Company serve at the discretion of the Board of Directors.
Eric C. Jackson has been President and Chief Executive Officer since June,
1999, and a Director since 1993. Mr. Jackson is currently Chief Executive
Officer of Great Basin Companies, a privately held company, that consists of a
group of truck dealerships headquartered in Salt Lake City, Utah.
John P. Chandler has been the Executive Vice President and Chief Operating
Officer since September, 1999. Prior to joining the Company, Mr. Chandler was
Chief Executive Officer for Tow America/Reliable Recovery Services, Inc., a
consolidator of towing and recovery companies was with Caliber System, Inc., and
it's subsidiary RPS, the nation's second largest ground carrier of small package
freight.
Thomas J. Bell has been Executive Vice President, Chief Financial
Officer, Secretary and Treasurer since March 17, 2000. Prior to joining the
Company, Mr. Bell was Senior Vice President and Chief Financial Officer of
Mosler, Inc., one of the largest security products providers in the nation,
since October, 1997. From 1991 to 1997 he was Chief Financial Officer for
Caruso, Inc., a produce distributor.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock is traded on The NASDAQ Small-Cap Market (NASDAQ) under
the symbol INET. The following table sets forth the high and low sales prices as
reported by NASDAQ.
1998 HIGH LOW
First Quarter 4.375 2.875
Second Quarter 4.750 3.313
Third Quarter 4.625 2.000
Fourth Quarter 3.438 2.125
1999
First Quarter 4.250 2.938
Second Quarter 4.125 2.563
Third Quarter 3.250 2.500
Fourth Quarter 3.000 2.000
2000
First Quarter 3.250 1.781
(Through March 1)
On March 1, 2000, there were 200 holders of record of Common Stock.
The Company has never paid a cash dividend on its Common Stock. The
Company's bank agreement contains covenants which restrict the Company's ability
to pay cash dividends. See Note 2 of Notes to Consolidated Financial
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Statements. The Company does not anticipate paying cash dividends on Common
Stock in the foreseeable future.
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Item 6. Selected Financial Data.
Year Ended December 31,
-----------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands, Except Per Share Amounts)
STATEMENT OF OPERATIONS DATA
Operating revenues $ 284,800 $ 262,722 $ 247,888 $ 224,613 $ 214,973
Operating expenses:
Purchased transportation
and equipment rents 133,338 118,681 108,292 87,834 80,997
Salaries, wages and benefits 71,478 63,940 59,943 60,017 58,733
Fuel and other operating expenses 52,240 47,936 48,550 49,251 46,610
Operating taxes and licenses 9,989 10,077 10,045 10,670 10,093
Insurance and claims 8,275 8,089 7,987 8,812 6,986
Depreciation 4,266 3,949 4,526 5,096 4,651
Other operating expenses 4,462 3,657 3,316 3,591 3,842
--------- --------- --------- --------- ---------
Total operating expenses 284,048 256,329 242,659 225,271 211,912
--------- --------- --------- --------- ---------
Operating income (loss) 752 6,393 5,229 (658) 3,061
Interest expense (2,525) (2,554) (2,908) (2,397) (2,886)
Settlement of pension claim (2,500) -- -- -- --
Other income (expense), net (420) (420) (420) (420) (82)
--------- --------- --------- --------- ---------
Earnings (loss) before income taxes (4,693) 3,419 1,901 (3,475) 93
Income taxes (146) (523) (580) -- (305)
--------- --------- --------- --------- ---------
Net earnings (loss) $ (4,839) $ 2,896 $ 1,321 $ (3,475) $ (212)
========= ========= ========= ========= =========
Basic and diluted earnings (loss $ (0.35) $ 0.21 $ 0.10 $ (0.26) $ (0.02)
========= ========= ========= ========= =========
BALANCE SHEET DATA
Current assets $ 45,153 $ 38,906 $ 36,499 $ 30,348 $ 26,716
Current liabilities 28,933 30,524 29,293 30,216 27,339
Total assets 76,841 77,800 75,964 77,168 67,638
Long-term debt 25,208 20,105 22,401 24,210 14,981
Shareholders' equity 19,900 24,371 21,470 19,892 23,018
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
INTRODUCTION
The Company reported a net loss in 1999 of $4.8 million on revenues of
$284.8 million, as compared to net earnings of $2.9 million on revenues of
$262.7 million in 1998, and net earnings of $1.3 million on revenues of $247.9
million in 1997. The 1999 results included a $2.5 million charge in connection
with settlement of a legal proceeding, approximately $.5 million for severance
arrangements entered into with former Company management and a $.5 million
write-down on assets identified for disposal.
As discussed more fully below, the Company's performance throughout 1999
reflects the effects of rising diesel fuel prices and fewer qualified drivers
available to operate equipment, offset by some pricing improvements.
A discussion of the impact of the above and other factors on the results of
operations in 1999 as compared to 1998, and 1998 as compared to 1997 follows.
1999 COMPARED TO 1998
Key Operating Statistics 1999 1998 Change
- ------------------------ ---- ---- ------
Operating Revenues ($ millions) $284.8 $262.7 8.4%
Net Earnings ($4.8) $2.9 NM
Average Tractors 2,432 2,250 8.1%
Total Loads (000's) 377.5 354.6 6.5%
Revenue Miles (millions) 176.3 166.7 5.8%
Average Revenue per Revenue Mile $1.400 $1.374 1.9%
Operating Revenues. Operating revenues increased by $22.1 million, or 8.4%
in 1999, to $284.8 million from $262.7 million in 1998. Included in 1999 total
revenues was approximately $0.9 million of Company fuel surcharge revenue,
primarily generated in the fourth quarter. The largest revenue increase occurred
in the owner-operator fleet which increased $11.2 million, or 11.7%, from $95.4
million in 1998, to $106.6 million in 1999. Company fleet revenues increased
$6.7 million, exclusive of fuel surcharges, or 5.1% in 1999, over 1998, while
brokerage revenues increased by $4.2 million, or 12.4%.
The average fleet size in 1999, grew by roughly 180 units, compared to 1998.
In the aggregate, revenue miles (volume), increased by 5.8%. This increase was
attributable to the business generated by an agency agreement and growth in the
number of owner operator units. Freight demand remained relatively strong in
1999, and aided in the growth in revenue. The implementation of software that
improved load selection and evaluation promoted revenue growth.
Operating Expenses. The following table sets forth the percentage
relationship of operating expenses to operating revenues for the years ended
December 31, 1999 and 1998.
1999 1998
---- ----
Operating Revenues 100.0% 100.0%
Operating Expenses:
Purchased transportation and
equipment rents 46.8 45.2
Salaries, wages and benefits 25.1 24.3
Fuel and other operating expenses 18.3 18.2
Operating taxes and licenses 3.5 3.9
Insurance and claims 2.9 3.2
Depreciation 1.5 1.5
Other operating expenses 1.6 1.3
Total Operating Expenses 99.7% 97.6%
In 1999, purchased transportation and equipment rents increased as a
percentage of revenue compared to 1998 due to the larger portion of freight
carried by owner operators, an additional 75 tractors placed in service for the
RRT agency agreement that were financed under an operating lease and an increase
in freight brokered to other carriers.
The average driver's wages increased nearly $0.04 per mile in 1999, ($4.8
million), compared to 1998, yet, salaries, wages and benefits increased slightly
less than 1%, as a percentage of revenue, since much of the revenue growth came
from the increased use of owner operators. In 1999, the Company incurred costs
related to severance agreements with two former executives that totaled
approximately $550,000.
Fuel and other operating expenses are attributable to company-operated
equipment and these expenses remained relatively the same as a percentage of
revenues in 1999, compared to 1998, due to the increased use of owner operators.
The average cost of fuel at the pump increased nearly $0.09 per gallon in 1999,
which impacted the Company's results by approximately $2.0 million. The Company
was able to recover some of the fuel price increase through fuel surcharges (see
operating revenues), but these were not activated until late in the third
quarter. The average price of fuel increased nearly $0.22 per gallon during the
last six months of 1999. Other operating costs increased by roughly $300,000 in
1999, primarily due to increased maintenance cost.
Operating taxes and licenses declined as a percent of revenue due to the
higher growth in owner operator and brokerage revenue not requiring licensing
from the Company.
Insurance and claim costs as a percentage of revenue were lower in 1999,
due to a lower deductible exposure on certain insurance programs and the
increase in revenue
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brokered to others. Overall, insurance premiums increased slightly in 1999, as
compared to 1998.
Depreciation expense remained constant as a percentage of revenue in 1999,
compared to 1998, with the continued reduction of the Company's investment in
capital leases to finance revenue equipment offset by $500,000 of write-downs of
assets marked for disposal. Those assets marked for disposal were comprised of
the former headquarters of RRT and unused equipment and trailers at an ADS
terminal.
Other operating expenses were higher as a percent of revenue in 1999 due to
increased provisions for doubtful accounts and higher professional fees.
Interest Expense. Interest expense remained the same in 1999 compared to
1998, with the interest cost reduction from replacing equipment financed with
capital lease obligations with equipment financed by operating leases offset by
an increase in bank interest. Interest on bank borrowings increased
approximately $300,000, compared to 1998, due to an increased average borrowing
base for the year.
Settlement of Pension Claim. During the second and third quarters of 1999,
the Company recorded a charge amounting to $2.5 million representing the amount
paid to settle a claim asserted by the Central States Southeast and Southwest
Areas Pension Fund under the Employee Retirement Income Security Act of 1974, as
amended by the Multi-employer Pension Plan Amendments Act of 1980, ("MPPAA").
Provision For Income Taxes. No provision for Federal income tax was
provided in 1999 as a result of the operating losses incurred. The Company
recorded approximately $150,000 of state income taxes. The effective tax rate is
lower than the statutory tax rate due to the reversal of valuation allowance
reserves established in prior years, offset by the impact of certain
non-deductible expenses.
1998 COMPARED TO 1997
%
KEY OPERATING STATISTICS 1998 1997 CHANGE
- ------------------------ ---- ---- ------
Operating Revenues ($ millions) $262.7 $247.9 6.0%
Net Earnings $2.9 $1.3 123.1%
Average Tractors 2,250 2,225 1.1%
Total Loads (000's) 354.6 306.3 15.8%
Revenue Miles (millions) 166.7 170.1 (2.0%)
Average Revenue per Revenue Mile $1.374 $1.321 4.0%
Operating Revenues. Operating revenues increased by $14.8 million, or 6.0%
in 1998, to $262.7 million from $247.9 million in 1997. The majority of this
increase occurred in brokered revenue which increased $10.6 million, or 45.5%,
from $23.2 million in 1997, to $33.8 million in 1998. The acquisition of the
assets of Ram Trans, a flatbed brokerage and logistics company located in
Denver, Colorado, late in the second quarter of 1998, accounted for $3.0 million
of the increase in brokered revenue. In addition to this acquisition, all of the
operating subsidiaries reported significant growth in their brokerage business.
Company fleet revenues also increased $4.3 million, or 3.4% in 1998, over 1997,
while owner-operator revenues decreased $0.1 million, or 0.1%.
There was virtually no change in the average fleet size in 1998, compared to
1997. In the aggregate, revenue miles (volume), actually declined 2.0%. This
decline was attributable to the shorter length of haul from the RRT regional
operations and the container movements from EMT. Freight demand in 1998, was
relatively strong and accounted for the aforementioned growth in the brokered
revenues. These competitive conditions allowed for a 4.0% increase in average
revenue per revenue mile (price), which led to the $4.3 million growth in
Company fleet revenues.
Operating Expenses. The following table sets forth the percentage
relationship of operating expenses to operating revenues for the years ended
December 31, 1998 and 1997.
1998 1997
---- ----
Operating Revenues 100.0% 100.0%
Operating Expenses:
Purchased transportation and
equipment rents 45.2 43.7
Salaries, wages and benefits 24.3 24.2
Fuel and other operating expenses 18.2 19.6
Operating taxes and licenses 3.9 4.1
Insurance and claims 3.2 3.2
Depreciation 1.5 1.8
Other operating expenses 1.3 1.3
Total Operating Expenses 97.6% 97.9%
In 1998, purchased transportation and equipment rents increased as a
percentage of revenue compared to 1997 due to the amount of freight brokered to
other carriers. This increase occurred because of the increase in freight demand
and the acquisition of Ram Trans.
Although the average driver's wages increased approximately $0.02 per mile
in 1998, ($2.9 million), compared to 1997, salaries, wages and benefits
increased only slightly as a percentage of revenue because of the increase in
the average revenue per revenue mile and the relatively smaller portion of the
Company's total revenue being generated by company-operated equipment.
Fuel and other operating expenses decreased significantly in 1998, compared
to 1997, because the average cost of fuel at the pump declined $0.15 per gallon.
The benefit of this decrease was partially offset by acquisition expenses, a
significant loss of fuel surcharge revenue, and the increased cost of
communication expense attributable to the pay phone users' surcharge.
Depreciation expense declined as a percentage of revenue in 1998, compared
to 1997, as a result of the Company's continued reliance on non-capitalized
leases as a means of acquiring its tractors and trailers.
11
12
Interest Expense. Interest expense decreased in 1998, primarily as a result
of replacing equipment financed with capital lease obligations with equipment
financed by operating leases. Interest on bank borrowings was flat in 1998,
compared to 1997, due to a slight increase in the average borrowings offset by a
reduction in the borrowing rate.
Provision For Income Taxes. The provision in 1998 was approximately $0.5
million, or 15.3% of pretax earnings. The effective tax rate is lower than the
statutory tax rate due to the reversal of valuation allowance reserves
established in prior years, offset by the impact of certain non-deductible
expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $0.5 million of cash and cash equivalents in the year
ended December 31, 1999, and used $0.3 million in the year ended December 31,
1998. As reflected in the accompanying Consolidated Statements of Cash Flows, in
1999, $4.4 million of cash was absorbed by operating activities, as compared to
$3.9 million generated in 1998. In 1999, operating cash used primarily funded
losses generated and growth in receivable's offset by depreciation and the
expensing of prior period payments made in connection with the settlement of a
pension claim. The $0.4 million, net, generated in investing activities in 1999
was a result of disposal of equipment purchased at the end of some of its
operating leases in 1998. Investing activity in 1998 used approximately $2.6
million as a result of equipment purchased at the end of operating leases.
Borrowings under the line of credit increased by over $7.6 million primarily due
to fund principal payments on long term debt and cash to fund operating losses.
On October 1, 1999, the Company elected to change its insurance carriers
for certain policies. The new insurance companies required that $3.4 million of
letters of credit be posted to secure deductible exposure, ratably over the 12
month period ending September, 2000. In addition, the Company was notified by
the former carrier of certain of its insurance polices that the Company would
need to provide additional collateral of $400,000 to secure the Company's
deductible obligations for outstanding claims. The Company has complied with
the request.
On January 14, 2000, a group consisting of management of the Company and
members of the Board of Directors, infused $2.3 million capital in the form of
subordinate loans. The infusion of at least $2.0 million of cash was a condition
precedent to the February 4, 2000 bank agreement. On March 13, 2000, the Company
repaid the loans in full with the proceeds of a private offering of 1,150,000
shares of the Company's common stock. The same persons who made the subordinated
loans to the Company purchased the stock at $2.00 per share.
On February 4, 2000, the Company signed a new bank credit facility which
consists of a $32 million revolving line of credit, a $3.5 million term loan and
a $2.5 million capital expenditure loan, all with a final maturity date of
January 1, 2002. The applicable interest rate on borrowings under all facilities
is based upon a financial performance matrix, which is currently 225 basis
points over the daily LIBOR rate. Borrowings under the line of credit are
limited to amounts determined by a formula tied to the Company's eligible
accounts receivable, as defined in the agreement. The line of credit also
includes provisions for the issuance of $15 million in standby letters of
credit, which as issued, reduce the amount available for borrowings. Borrowing
capacity based upon the terms of the new facility would have been approximately
$2 million at December 31, 1999. The term loan requires quarterly principal
payments of approximately $290,000. The availability of the capital expenditure
loan is limited based upon the achievement of certain financial covenants and
there are presently no outstanding borrowings under the capital expenditure
loan. The bank credit facility is secured by substantially all of the Company's
accounts receivables, property and equipment.
At December 31, 1999, the Company was not in compliance with a minimum net
worth financial covenant contained in the prior bank credit facility. In light
of the new bank credit facility signed on February 4, 2000, the lender waived
this event of non-compliance through the period ending and including January 31,
2000. The Company was in compliance with all other financial covenants as of
December 31, 1999.
The bank credit facility signed on February 4, 2000 contains, among other
provisions, financial covenants which require the Company to achieve a minimum
level of net worth and specified ratios of fixed charges, current ratio and of
debt to earnings before interest, taxes, depreciation and amortization (EBITDA).
The minimum financial covenant targets increase periodically throughout 2000 and
compliance is required to be measured and evaluated on a monthly basis.
During the three months ended March 31, 2000, the Company has continued
to experience the effects of rising diesel fuel prices and a shortage of
qualified drivers available to operate equipment. While these factors have been
partially offset by some pricing improvements, the Company will report a net
loss for the first quarter of 2000. In consideration of these factors, effective
April 13, 2000 the Company signed an amendment to the February 4, 2000, bank
credit facility. Under the terms of the amendment, the financial covenants
discussed above have been modified to more closely reflect the Company's current
operating performance, the interest rate on the revolving line of credit has
been increased from LIBOR plus 225 basis points to LIBOR plus 300 basis points,
and the interest rate applied to issued standby letters of credit has been
increased from 1% to 1-3/8%. The amendment also requires the Company to maintain
an available borrowing capacity under the revolving credit agreement of at least
$2 million. Based upon management's current estimates of future operations and
cash flows, the Company believes that it will be able to maintain compliance
with the modified financial covenants contained in the amendment. However, there
can be no assurance that management's estimates of future operations and cash
flows will be achieved.
12
13
As previously discussed the cost of fuel increased significantly during
1999, with the average increase approximating $.09 per gallon. During the first
quarter of 2000, the industry has experienced additional increases that
approximate $.24 per gallon. The cost of oil hit a peak on March 8, 2000 at
$34.37 per barrel (New York price), and recently has stabilized at approximately
$27 per barrel. Based upon production estimates made by the Organization of
Petroleum Exporting Countries (OPEC), which indicate increased available supply
during the remainder of 2000, the Company believes that the cost of diesel fuel
will remain stable or decrease during the remainder of of the year 2000.
However, there are no assurances that worldwide supply will remain at current
levels or that other factors will not impact the cost of fuel.
The Company believes that cash generated from operating, financing and
investing activities and cash available to it under the bank credit facility
will be sufficient to meet the Company's needs during 2000.
OTHER FACTORS
On April 7, 2000, three executives, including the President, and four
members of the finance and administrative staff of EMT left the Company and
joined a competitor. The Company does not believe that this event will have a
material adverse effect on future business, but the ultimate impact cannot yet
be determined. On April 11, 2000, the Company filled two of the positions,
including the President's, with experienced executives from within other
Intrenet companies.
Inflation can be expected to have an impact on most of the Company's
operating costs although the impact of inflation in recent years has been
minimal. Changes in market interest rates can be expected to impact the Company
to the extent that revenue equipment is added and replaced and because the
Company's lease rates and bank financing are related to market interest rates.
The trucking industry is generally affected by customer business cycles and
by seasonality. Revenues are also affected by inclement weather and holidays
because revenues are directly related to available working days of shippers.
Customers typically reduce shipments during and after the winter holiday season.
The Company's revenues tend to follow this pattern and are strongest in the
summer months. Generally, the second and third calendar quarters have higher
load bookings than the fourth and first calendar quarters.
NEW ACCOUNTING PRONOUNCEMENTS
In June, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" which establishes standards for reporting and display of comprehensive
income and its components. The FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" which establishes standards
for reporting information on operating segments. These statements are effective
for fiscal years beginning after December 15, 1998. At this time, the Company
has determined there is no reporting impact on these statements or its
disclosures.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as subsequently amended, is effective for the Company's 2001 year.
The statement revises the accounting for derivative instruments and requires
among other things, that derivative instruments be recorded within the financial
statements. The Company does not currently utilize derivative instruments.
YEAR 2000
The Company did not experience, and is not aware of any system noncompliance
issues related to Year 2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's earnings are impacted by financial risk related to
volatility in interest rates related to variable debt instruments. These debt
instruments are non-trading in nature and are used to fund the Company's
day-to-day operations. Based upon the principal amounts outstanding at December
31, 1999, for those variable rate debt instruments, a market change of 100
basis-points in interest rates would correspond to an approximate $185,000
impact in interest expense for a one-year period. This sensitivity analysis does
not account for any change in the borrowings outstanding, which may be reduced
through payments or increased through additional borrowings, and does not
consider the Company's ability to fix the interest rate on one of the three
variable rate debt instruments. This analysis also does not account for any
management actions which may be taken in response to these changes. The Company
has no material future earnings impact or cash flow expense from changes in
interest rates related to its financing of operating equipment as all of the
Company's equipment financing has fixed rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's audited financial statements, including its consolidated
balance sheets and consolidated statements of earnings, cash flows,
stockholders' equity, and notes related thereto, are listed below:
Page
----
Consolidated Balance Sheets 17
Consolidated Statements of Operations 18
Consolidated Statements of Shareholders' Equity 19
Consolidated Statements of Cash Flows 20
Notes to Consolidated Financial Statements 21
Report of Independent Public Accountants 26
13
14
The supplementary unaudited quarterly financial data follows:
(Dollars in thousands, except earnings per share)
1999 1998
---- ----
FIRST QUARTER
Operating revenue $ 66,316 $ 60,676
Operating income $ 1,097 $ 1,284
Pretax income $ 373 $ 516
Income taxes $ 140 $ 131
Net earnings $ 233 $ 388
Basic and diluted earnings
per share $ 0.02 $ 0.03
SECOND QUARTER
Operating revenue $ 72,171 $ 66,351
Operating income $ 204 $ 2,354
Pretax income (loss) ($ 2,730) $ 1,606
Income taxes ($ 48) $ 360
Net earnings (loss) ($ 2,682) $ 1,246
Basic and diluted earnings
per share ($ 0.20) $ 0.09
THIRD QUARTER
Operating revenue $ 74,702 $ 69,794
Operating income $ 1,180 $ 1,995
Pretax income $ 175 $ 1,252
Income taxes $ 24 $ 284
Net earnings $ 151 $ 968
Basic and diluted earnings
per share $ 0.01 $ 0.07
FOURTH QUARTER
Operating revenue $ 71,612 $ 65,902
Operating income (loss) ($ 1,731) $ 762
Pretax income (loss) ($ 2,513) $ 43
Income taxes (benefit) $ 30 ($ 252)
Net earnings (loss) ($ 2,543) $ 295
Basic and diluted earnings (loss)
per share ($ 0.18) $ 0.02
In the second and third quarter 1999 pretax profit included a special charge of
$2.5 million for settlement of a pension claim. The special charge included in
net loss was $0.18 per share for 1999.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is incorporated herein by reference
to the Company's definitive Proxy Statement for its annual meeting of
shareholders to be filed with the Commission pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated herein by reference
to the Company's definitive Proxy Statement for its annual meeting of
shareholders to be filed with the Commission pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated herein by reference
to the Company's definitive Proxy Statement for its annual meeting of
shareholders to be filed with the Commission pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated herein by reference
to the Company's definitive Proxy Statement for its annual meeting of
shareholders to be filed with the Commission pursuant to Regulation 14A.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
All financial statements of the Registrant are set forth under Item 8 of
this Report.
(2) Financial Statement Schedules
None
(3) Exhibits - See Index to Exhibits on page 16 of this Report.
The Company will furnish any exhibit upon request and upon payment of the
Company's reasonable expenses in furnishing such exhibit.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of 1999.
14
15
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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.
INTRENET, INC.
By: /s/ Eric C. Jackson
---------------------------------
Eric C. Jackson
President and Chief Executive Officer
Date: April 14, 2000
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Eric C. Jackson President, Chief Executive April 14, 2000
- -------------------------- Officer and Director
Eric C. Jackson (Principal Executive Officer)
/s/ John P. Chandler
- -------------------------- Executive Vice-president, April 14, 2000
John P. Chandler Chief Operating Officer
/s/ Thomas J. Bell
- ------------------------ Executive Vice-president, April 14, 2000
Thomas J. Bell Chief Financial Officer,
Secretary and Treasurer
/s/ Edwin H. Morgens
- --------------------------- Chairman of the Board and Director April 14, 2000
Edwin H. Morgens
/s/
- --------------------------- Vice-Chairman of the Board and Director April 14, 2000
Robert B. Fagenson
/s/
- --------------------------- Director April 14, 2000
Vincent A. Carrino
/s/ Ned N. Fleming, III
- --------------------------- Director April 14, 2000
Ned N. Fleming, III
/s/ Thomas J. Noonan, Jr.
- --------------------------- Director April 14, 2000
Thomas J. Noonan, Jr.
/s/ Gerald Anthony Ryan
- --------------------------- Director April 14, 2000
Gerald Anthony Ryan
/s/ Philip Scaturro
- --------------------------- Director April 14, 2000
Philip Scaturro
15
16
INDEX TO EXHIBITS
PAGE NUMBER OR INCORPORATION
EXHIBIT BY REFERENCE TO AN EXHIBIT
NUMBER DESCRIPTION FILED AS PART OF
------ ----------- ----------------
3.1 Restated Articles of the Registrant Registration Statement on Form 8-A/A
filed on August 11, 1995, as Exhibit 2 (a)
3.2 Restated Bylaws of the Registrant Registration Statement on Form 8-A/A
filed on August 11, 1995, as Exhibit 2 (b)
3.21 Amended Bylaws of the Registrant Quarterly Report on Form 10-Q for the
quarter ending March 31, 1999, as
Exhibit 3.2
10.1 Fifth Amended and Restated Loan XX
Agreement dated as of February 4, 2000,
by and among the Registrant, certain
subsidiaries and The Huntington
National Bank
10.2* 1992 Non-Qualified Stock Option Plan Annual Report on Form 10-K for the
year ended December 31, 1992, as
Exhibit 10.2
10.3* Stock Option Agreement dated as of Quarterly Report on Form 10-Q for the
July 20, 1999, between the Company quarter ended September 30, 1999, as
and Eric C. Jackson Exhibit 10.3
10.4* Stock Option Agreement dated as of Quarterly Report on Form 10-Q for the
September 17, 1999, between the Company quarter ended September 30, 1999, as
and John P. Chandler Exhibit 10.4
10.5* Employment Agreement dated as of Quarterly Report on Form 10-Q for the
September 17, 1999, between the Company quarter ended September 30, 1999, as
and John P. Chandler Exhibit 10.2
10.6* 1993 Stock Option and Incentive Plan Registration Statement on Form S-8
(Registration No. 33-69882) filed
September 29, 1993, as exhibit 4E
XX
21 List of Subsidiaries of the Registrant XX
27 Financial Data Schedule XX
- ------------------------------
* The indicated exhibit is a management contract, compensatory plan or
arrangement required to be filed by Item 601 of Regulation S-K.
16
17
INTRENET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
YEARS ENDED DECEMBER 31, 1999 AND 1998
(In Thousands of Dollars Except Share Data)
Assets 1999 1998
------ ---- ----
Current assets:
Cash and cash equivalents $ 782 $ 271
Receivables:
Trade, principally freight revenue less
allowance for doubtful accounts of $1,816 in 1999
and $1,537 in 1998 35,251 30,881
Other 2,827 2,352
Prepaid expenses and other 6,293 5,402
------- -------
Total current assets 45,153 38,906
Property and equipment, at cost, less accumulated
depreciation of $22,490 in 1999 and $20,810 in 1998 24,080 28,833
Reorganization value in excess of amounts allocated
to identifiable assets, net of accumulated amortization
of $6,001 in 1999 and $5,581 in 1998 4,441 4,967
Deferred income taxes, net 2,886 2,886
Other assets (see note 4) 281 2,208
Total assets $76,841 $77,800
======= =======
Liabilities and Shareholders' Equity
Current liabilities:
Current debt and capital lease obligations $ 4,858 $ 5,789
Accounts payable and cash overdrafts 8,304 9,439
Current accrued claim liabilities 8,159 7,878
Other accrued expenses 7,612 7,418
------- -------
Total current liabilities 28,933 30,524
------- -------
Long-term debt and capital lease obligations 25,208 20,105
Long-term accrued claim liabilities 2,800 2,800
------- -------
Total liabilities 56,941 53,429
------- -------
Shareholders' equity:
Common stock, without par value; 20,000,000
shares authorized; 13,844,066 and 13,662,066 shares
issued and outstanding at December 31, respectively 17,224 16,856
Retained earnings since January 1, 1991 2,676 7,515
------- -------
Total shareholders' equity 19,900 24,371
------- -------
Total liabilities and shareholders' equity $76,841 $77,800
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
17
18
INTRENET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(In Thousands of Dollars, Except Shares and Per Share Data)
1999 1998 1997
---- ---- ----
Operating revenues $ 284,800 $ 262,722 $ 247,888
Operating expenses:
Purchased transportation
and equipment rents 133,338 118,681 108,292
Salaries, wages, and benefits 71,478 63,940 59,943
Fuel and other operating expenses 52,240 47,936 48,550
Operating taxes and licenses 9,989 10,077 10,045
Insurance and claims 8,275 8,089 7,987
Depreciation 4,266 3,949 4,526
Other operating expenses 4,462 3,657 3,316
------------ ------------ ------------
284,048 256,329 242,659
------------ ------------ ------------
Operating Income 752 6,393 5,229
Interest expense (2,525) (2,554) (2,908)
Settlement of pension claim (2,500) -- --
Other expense, net (420) (420) (420)
------------ ------------ ------------
Earnings (loss) before income taxes (4,693) 3,419 1,901
Provision for income taxes (146) (523) (580)
------------ ------------ ------------
Net income (loss) $ (4,839) $ 2,896 $ 1,321
============ ============ ============
Basic and diluted earnings per share $ (0.35) $ 0.21 $ 0.10
============ ============ ============
Weighted average shares outstanding during period 13,706,219 13,550,594 13,476,861
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
18
19
INTRENET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(In Thousands of Dollars)
Retained Shareholders'
Common Stock Earnings Equity
--------------------- ---------- ------------
Shares Dollars
Balance, December 31, 1996 13,412,138 $ 16,594 $ 3,298 $ 19,892
Exercise of stock options 136,000 257 -- 257
Net income for 1997 -- -- 1,321 1,321
---------- ---------- ---------- ----------
Balance, December 31, 1997 13,548,136 16,851 4,619 21,470
Exercise of stock options 2,500 5 -- 5
Exercise of Warrants 111,428 -- -- --
Net income for 1998 -- -- 2,896 2,896
---------- ---------- ---------- ----------
Balance, December 31, 1998 13,662,066 16,856 7,515 24,371
Exercise of stock options 182,000 368 -- 368
Net loss for 1999 -- -- (4,839) (4,839)
---------- ---------- ---------- ----------
Balance, December 31, 1999 13,844,066 $ 17,224 $ 2,676 $ 19,900
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
19
20
INTRENET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(In Thousands of Dollars)
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net income (loss) $(4,839) $ 2,896 $ 1,321
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Deferred income taxes 106 523 580
Depreciation and amortization 4,769 4,392 4,946
Provision for doubtful accounts 716 468 397
Settlement of pension claim 1,588 -- --
Changes in assets and liabilities, net:
Receivables (5,561) (3,227) (5,537)
Prepaid expenses and other (891) (871) (822)
Accounts payable and accrued expenses (321) (282) 1,155
------- ------- -------
Net cash provided by (used in) operating activities (4,433) 3,899 2,040
------- ------- -------
Cash flows from financing activities:
Borrowings in line of credit, net 7,598 2,134 2,459
Principal payments on long-term debt (3,425) (3,809) (5,616)
Proceeds from exercise of stock options 368 5 193
------- ------- -------
Net cash provided by (used in) financing activities 4,541 (1,670) (2,964)
------- ------- -------
Cash flows from investing activities:
Additions to property and equipment (1,559) (2,883) (1,179)
Disposals of property and equipment 1,962 327 2,291
------- ------- -------
Net cash provided by (used in) investing activities 403 (2,556) 1,112
------- ------- -------
Net increase (decrease) in cash and cash equivalents 511 (327) 188
Cash and cash equivalents:
Beginning of period 271 598 410
------- ------- -------
End of period $ 782 $ 271 $ 598
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
20
21
INTRENET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of Intrenet, Inc., and all of its subsidiaries (the Company). Truckload carrier
subsidiaries at December 31, 1999, were Roadrunner Trucking, Inc. (RRT), Eck
Miller Transportation Corporation (EMT), Advanced Distribution System, Inc.
(ADS), and Roadrunner Distribution Services, Inc. (RDS). Also included is the
Company's broker and logistics manager INET Logistics, Inc. (INL). All
significant intercompany transactions are eliminated in consolidation. Through
its subsidiaries, the Company provides general and specialized regional
truckload carrier, brokerage and logistics management services throughout North
America.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities, and
disclosure of contingent liabilities, at the date of the financial statements,
as well as the reported amounts of revenues and expenses for the reporting
period(s). Actual results could differ from these estimates.
REVENUE RECOGNITION
Operating revenues are recognized when the freight is picked up.
Related transportation expenses including driver wages, purchased
transportation, fuel and fuel taxes, agent commissions, and insurance premiums
are accrued when the revenue is recognized. The Company has determined that the
cumulative effect of changing to revenue recognition when the freight is
delivered is immaterial and the effect on the annual operating results is
negligible.
In 1991, the Emerging Issues Task Force (EITF) released Issue 91-9,
"Revenue and Expense Recognition for Freight Services in Process". The EITF
reached the conclusion that the preferable method for recognizing revenue and
expense was either (1) recognition of both revenue and direct cost when the
shipment is completed, or (2) allocation of revenue between reporting periods
based on relative transit time in each reporting period and recognize expenses
as incurred. The difference between the Company's method of revenue recognition,
and the preferable methods described above, is not material to the results of
operations or financial condition of the Company. The Company anticipates that
it will change its revenue recognition policy to one of the preferable methods
no later than the quarter ended June 30, 2000 as provided for by SEC Staff
Accounting Bulletin No. 101, "Revenue Recognition".
ACCOUNTS RECEIVABLE
Accounts receivable consist principally of freight revenue less
allowance for doubtful accounts. Provision expense for doubtful accounts was
$716,000, $468,000, and $397,000, in 1999, 1998, and 1997, respectively.
Allowances for doubtful accounts were $1,816,000, $1,537,000, and $1,110,000, at
December 31, 1999, 1998, and 1997, respectively.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost less an allowance for
depreciation. Major additions and betterments are capitalized, while maintenance
and repairs that do not improve or extend the life of the respective asset, are
expensed as incurred. Improvements to leased premises are amortized on a
straight-line basis over the terms of the respective lease. Operating lease
tractor rentals are expensed as a part of purchased transportation and equipment
rents. Depreciation of property and equipment is provided on a straight-line
basis over the following estimated useful lives of the respective assets, or
life of the lease for equipment under capital leases:
Buildings and Improvements....................... 10 - 40 years
Revenue Equipment................................ 3 - 8 years
Other Property................................... 3 - 7 years
In accordance with Statement of Financial Accounting Standards (SFAS)
No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of", the carrying value of long-lived assets is assessed
for recoverability by management when changes in circumstances indicate that the
carrying amount may not be recoverable, based on an analysis of the undiscounted
future expected cash flows from the use and ultimate disposition of the asset.
In 1999, the Company recorded an impairment loss of $.5 million for the disposal
of the former headquarters of RRT which is being held for sale and certain idle
equipment and trailers at ADS. This impairment charge has been classified as
part of depreciation expense. There were no significant impairment losses
incurred in 1998 and 1997.
REORGANIZATION VALUE IN EXCESS OF
AMOUNTS ALLOCATED TO IDENTIFIABLE ASSETS
Reorganization Value in Excess of Amounts Allocated to Identifiable
Assets, resulting from the Chapter 11 reorganization of the Company in 1990, is
being amortized on a straight-line basis over 35 years. Benefits from
recognition of reversal of valuation allowance reserves established against
pre-reorganization net operating loss carryforwards (see Note 5) are reported as
reductions of the Reorganization Value, and thus reduce its effective life.
DEBT ISSUANCE COSTS AND BANK FEES
Debt issuance costs and bank fees are amortized over the period of the
related debt agreements.
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ACCRUED CLAIM LIABILITIES
The Company maintains insurance coverage for liability, cargo and
workers' compensation risks, among others, which have deductible obligations
ranging to $250,000 per occurrence. Provision is made in the Company's financial
statements for these deductible obligations at the time the incidents occur, and
for claims incurred but not reported, using actuarial assumptions and the
Company's experience. During 1999, the Company engaged and received the results
of a third party actuarial study to assist in the evaluation of the Companies
deductible reserves in the insurance areas of auto liability and workers'
compensation. Claim deductible obligations which remain unpaid at the balance
sheet date are reflected in the financial statement caption "Accrued Claim
Liabilities" in the accompanying consolidated financial statements. Current
Accrued Claim Liabilities are claims estimated to be paid in the twelve month
period subsequent to the balance sheet date, while Long-Term Accrued Claim
Liabilities are claims estimated to be paid thereafter.
INCOME TAXES
The Company and its subsidiaries file a consolidated Federal income tax
return. The Company recognizes income taxes under the liability method of
accounting for income taxes. The liability method recognizes tax assets and
liabilities for future taxable income or deductions resulting from differences
in the tax and financial reporting basis of assets and liabilities reflected in
the balance sheet and the expected tax impact of carryforwards for tax purposes.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per common and common equivalent share have been computed
using basic and diluted weighted average common shares outstanding during the
period in accodance with SFAS No. 128 "Earnings per Share".
CREDIT RISK
Financial investments that subject the Company to concentrations of credit
risk consist primarily of trade accounts receivable. Concentrations of credit
risk with respect to customer receivables are limited due to the Company's
diverse customer base, with no one customer, industry, or geographic region
comprising a large percentage of customer receivables or revenues.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures
About Fair Value of Financial Instruments", requires disclosure of fair value
information for certain financial instruments. The carrying amounts for trade
receivables and payables are considered to be their fair value. The differences
between the carrying amounts and the estimated fair values of the Company's
other financial instruments as of December 31, 1999, and 1998, were not
material.
STATEMENTS OF CASH FLOWS
Cash equivalents consist of highly liquid investments such as certificates
of deposit or money market funds with original maturities of three months or
less.
Cash payments for interest were $2.5 million, $2.6 million, and $2.9
million 1999, 1998, and 1997, respectively. In 1999, the Company received a
Federal alternative minimum income tax refund of $0.1 million. Cash payments for
Federal alternative minimum income taxes were $0.2 million in 1998 and $0.1
million in 1997.
ACCOUNTING FOR STOCK OPTIONS
The Company currently accounts for its employee stock option plans using
APB Opinion No. 25, Accounting for Stock Issued to Employees, which results in
no charge to earnings when issued options are granted at fair market value.
During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation", which considers the stock options as
compensation expense to the Company, based on their fair value at the date of
grant. The Company has elected to follow APB No. 25 in accounting for its stock
options and, provide the fair value disclosures required by SFAS No. 123.
Accordingly, no compensation cost has been recognized for stock options in the
consolidated financial statements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" which establishes standards for reporting and display of comprehensive
income and its components. The FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" which establishes standards
for reporting information on operating segments. These statements are effective
for fiscal years beginning after December 15, 1998. At this time, the Company
has determined there is no reporting impact on these statements or its
disclosures.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as subsequently amended, is effective for the Company's 2001 year.
The statement revises the accounting for derivative instruments and requires
among other things, that derivative instruments be recorded within the financial
statements. The Company does not currently utilize derivative instruments.
(2) BANK CREDIT FACILITY
On February 4, 2000, the Company signed a new bank credit facility which
consists of a $32 million revolving line of credit, a $3.5 million term loan and
a $2.5 million capital expenditure loan, all with a final maturity date of
January 1, 2002. The applicable interest rate on borrowings under all
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facilities is based upon a financial performance matrix, which is currently 225
basis points over the daily LIBOR rate. Borrowings under the line of credit are
limited to amounts determined by a formula tied to the Company's eligible
accounts receivable, as defined in the agreement. The line of credit also
includes provisions for the issuance of $15 million in standby letters of
credit, which as issued, reduce the amount available for borrowings. Borrowing
capacity based upon the terms of the new facility would have been approximately
$2 million at December 31, 1999. The term loan requires quarterly principal
payments of approximately $290,000. The availability of the capital expenditure
loan is limited based upon the achievement of certain financial covenants and
there are presently no outstanding borrowings under the capital expenditure
loan. The bank credit facility is secured by substantially all of the Company's
accounts receivables, property and equipment.
At December 31, 1999, the Company was not in compliance with a minimum net
worth financial covenant contained in the prior bank credit facility. In light
of the new bank credit facility signed on February 4, 2000, the lender waived
this event of non-compliance through the period ending and including January 31,
2000. The Company was in compliance with all other financial covenants as of
December 31, 1999.
The bank credit facility signed on February 4, 2000 contains, among other
provisions, financial covenants which require the Company to achieve a minimum
level of net worth and specified ratios of fixed charges, current ratio and of
debt to earnings before interest, taxes, depreciation and amortization (EBITDA).
The minimum financial covenant targets increase periodically throughout 2000 and
compliance is required to be measured and evaluated on a monthly basis.
During the three months ended March 31, 2000, the Company has continued
to experience the effects of rising diesel fuel prices and a shortage of
qualified drivers available to operate equipment. While these factors have been
partially offset by some pricing improvements, the Company will report a net
loss for the first quarter of 2000. In consideration of these factors, effective
April 11, 2000 the Company signed an amendment to the February 4, 2000, bank
credit facility. Under the terms of the amendment, the financial covenants
discussed above have been modified to more closely reflect the Company's current
operating performance, the interest rate on the revolving line of credit has
been increased from LIBOR plus 225 basis points to LIBOR plus 300 basis points,
and the interest rate applied to issued standby letters of credit has been
increased from 1% to 1-3/8%. The amendment also requires the Company to maintain
an available borrowing capacity under the revolving credit agreement of at least
$2 million. Based upon management's current estimates of future operations and
cash flows, the Company believes that it will be able to maintain compliance
with the modified financial covenants contained in the amendment. However, there
can be no assurance that management's estimates of future operations and cash
flows will be achieved.
(3) LEASES AND OTHER LONG-TERM OBLIGATIONS
The Company finances a majority of its revenue equipment under various
capital and non-cancelable operating leases, and with collateralized equipment
borrowings.
Long-term debt at December 31, 1999 and 1998 was:
1999 1998
---- ----
Bank term loan, interest at 175 basis
points over daily LIBOR, or 7.572% $ 1,800 $ 1,563
(a combination of prime plus 0.5%
and 250 basis points over LIBOR at
December 31, 1998)
Bank revolving line of credit, interest
at 175 basis points over daily LIBOR
or 7.572% (225 basis points over 16,684 9,323
LIBOR at December 31, 1998)
Real estate mortgage obligation, variable
interest rate at 2.45% over commercial
paper, currently 7.95%, option to fix
interest rate at 2.50% over ten year
Treasury
rate, maturing in 2007 1,728 1,903
Obligations collateralized by
equipment, maturing through 2000,
interest rates ranging from 7.5 to 10.2% 344 401
Capital lease obligations
collateralized by equipment,
maturing through 2003,
interest rates ranging
from 6.8% to 11.5% 9,510 12,704
-------- --------
Total 30,066 25,894
Less current maturities (4,858) (5,789)
-------- --------
Long-term debt $ 25,208 $ 20,105
======== ========
Under the terms of the February 4, 2000 credit facility, maturities of
long-term debt, excluding capital lease obligations, in the coming five years
are $1,490; $1,010; $16,884; $216 and $230 in 2000, 2001, 2002, 2003, and 2004,
respectively.
Future minimum lease payments under capital and non-cancelable operating
lease agreements at December 31, 1999, were as follows:
Capital Operating
Leases Leases
------ ------
2000 $3,832 $16,298
2001 4,398 12,451
2002 1,157 8,087
2003 2,687 2,891
2004 1,446 152
Future minimum lease payments 13,520 $39,879
=======
Amounts representing interest (2,041)
--------
Principal amount $11,479
=======
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Total rental expense under non-cancelable operating leases was $20,262,
$17,480, and $15,811, in 1999, 1998, and 1997, respectively.
Purchased transportation and equipment rent expense includes payments to
owner-operators of equipment under various short-term lease arrangements.
(4) LITIGATION AND CONTINGENCIES
On June 13, 1997, the Company received notice from the Central States
Southeast and Southwest Areas Pension Fund (the "Fund") of a claim pursuant to
the Employee Retirement Income Security Act of 1974, as amended by the
Multi-employer Pension Plan Amendments Act of 1980 ("MPPAA"). MPPAA provides
that, if an employer withdraws from participation in a multi-employer pension
plan, such as the Fund, the employer and members of the employer's "controlled
group" of businesses are jointly and severally liable for a portion of the
plan's under funding. The claim was based on the withdrawal of R-W Service
System, Inc. ("RW") from the Fund in 1992. RW was an indirect subsidiary of the
Company's predecessor, Circle Express, Inc., from March 1985 through April 1988,
when it and certain other subsidiaries were sold. The Fund claimed that RW's
withdrawal liability was approximately $3.7 million plus accrued interest in the
amount of approximately $1.7 million. The Company filed a formal request for
review of the claim and began making interim payments to the Fund as provided by
the MPPAA. As of August, 1999, the Company had made payments to the Fund that
total approximately $2.2 million. At that time, the Company offered to pay the
Fund $2.2 million in settlement of the claim and established a special charge of
$2.2 million with respect to this claim in the second quarter of 1999. In
September 1999, the Company finalized negotiations and settled the claim with
the Fund for a total of $2.5 million. Accordingly, the Company recorded an
additional $0.3 million special charge for the third quarter of 1999. Under the
terms of the settlement, the Company continued to make monthly payments of
$88,500 through November 1999, with a final payment in December 1999, of
approximately $30,000.
The Company's subsidiary, RDS, was a defendant in an action brought on
March 20, 1997, in the 327th District Court, El Paso, Texas, by a former
employee. The plaintiff alleged that he was injured as a result of the
negligence and gross negligence of RDS and received discriminatory treatment in
violation of the Texas Health and Safety Code. On March 13, 1998, a default
judgment was entered against RDS in the approximate amount of $1.0 million,
representing damages for medical expenses, loss of wage earning capacity,
physical pain and mental anguish, physical impairment, disfigurement and
punitive damages. RDS filed an appeal to the 8th Circuit Court of Appeals in El
Paso, Texas and on July 29, 1999, the 8th Circuit Court of Appeals in El Paso
issued a favorable ruling for RDS, reversing the default judgment and remanding
the case for trial. The Company has not recorded any charges related to this
matter at December 31, 1999. Management believes that this action should not
have a material adverse effect on the Company's liquidity, results of operations
or financial condition.
There are no other material pending legal proceedings to which the Company
or any of its subsidiaries is a party or of which any of their property is the
subject, other than routine litigation incidental to its business, primarily
involving claims for personal injury and property damage incurred in the
transportation of freight. The Company maintains insurance which covers
liability resulting from such transportation related claims in amounts customary
for the industry and which management believes to be adequate.
(5) INCOME TAXES
The provision for income taxes for the years ended December 31, 1999, 1998,
and 1997 was as follows:
1999 1998 1997
------------------------------
Current $ 146 $ - $ -
Deferred - 523 580
-------- ------- ------
Total Provision $ 146 $ 523 $ 580
======== ======= ======
Income tax expense attributable to income from operations differs from the
amounts computed by applying the U. S. Federal statutory tax rate of 34% to
pre-tax income from operations as a result of the following:
1999 1998 1997
---- ---- ----
Taxes at statutory rate $(1,596) $ 1,163 $ 646
Increase (decrease) resulting from:
Non-deductible amortization 143 143 143
Provision for (release of)
valuation allowance for
net deferred tax assets 1,300 (656) (345)
State Taxes 146 -- --
Other, net 153 (127) 136
------- ------- -------
Provision for Income Taxes $ 146 $ 523 $ 580
======= ======= =======
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The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December 31,
1999 and 1998 are as follows:
1999 1998
---- ----
Deferred Tax Assets
Insurance claim liabilities $ 4,077 $ 4,120
Reserve for doubtful accounts 549 426
Other 759 535
------- -------
5,385 5,081
------- -------
Deferred Tax Liabilities
Property differences, primarily
depreciation (2,512) (2,210)
Other (130) (129)
------- -------
(2,642) (2,339)
------- -------
Net Temporary Differences 2,743 2,742
------- -------
Carryforwards -
Pre-reorganization, limited, net
operating loss and other tax
carryforwards
(Expiring 2004-2006) 3,319 3,327
Post-reorganization net operating
loss and other tax carryforwards
(Expiring 2006-2011) 1,814 507
------- -------
Total Carryforwards 5,133 3,834
------- -------
Net Deferred Tax Assets 7,876 6,576
Valuation Allowance (4,990) (3,690)
------- -------
Recorded Net Deferred Tax Assets $ 2,886 $ 2,886
======= =======
Net changes to the valuation allowance in 1999 and 1998, were as follows:
Valuation allowance, beginning of year $(3,690) $(5,125)
Release of allowance held against
pre-reorganization deferred tax assets
against
Reorganization value in excess amounts
allocated to identifiable assets -- 779
Release of allowance held against
post-reorganization deferred tax assets
against provision for income taxes -- 656
Provision of valuation allowance
for net deferred tax assets (1,300) --
------- -------
Valuation allowance, end of year $(4,990) $(3,690)
======= =======
While management is optimistic that all net deferred tax assets will be
realized, such realization is dependent upon future taxable earnings. The
Company's carryforwards expire at specific future dates, and utilization of
certain carryforwards is limited to specific amounts each year. Accordingly, the
Company has recorded a valuation allowance against a portion of these net
deferred tax assets.
Benefits from the reversal of the valuation allowance reserves established
against pre-reorganization net deferred tax assets are reported as a reduction
of Reorganization Value in Excess of Amounts Allocated to Identifiable Assets.
Conversely, the reversal of valuation allowance reserves established against the
post-reorganization net deferred tax assets is recognized as a reduction of
income tax expense.
(6) STOCK OPTIONS AND EMPLOYEE COMPENSATION
In 1993, the Company adopted the 1993 Stock Option and Incentive Plan (the
1993 Option Plan). The 1993 Option Plan allows the Company to grant options to
purchase up to 1,000,000 shares of Common Stock to officers and key employees of
the Company and its operating subsidiaries. Options issued to date under the
1993 Option Plan have an exercise price equal to market value on the date of
grant, and are generally exercisable for a ten year period.
The Company accounts for stock options using APB Opinion No. 25,
Accounting for Stock Issued to Employees, under which no compensation expense is
recognized for options issued at or above market price on the date of grant. Had
compensation cost been determined consistent with SFAS No. 123, Accounting for
Stock-Based Compensation, the Company's net income (loss) would have been
($5,159,281), $2,694,243, and $888,310, for 1999, 1998, and 1997, respectively
(earnings per share would have been ($0.38), $0.20, and $0.07, respectively).
The activity and weighted average prices for options granted in 1999,
1998, and 1997 were as follows:
# of Weighted Avg.
Shares Exercise Price
------ --------------
Balance at December 31, 1996 886,500 $2.29
Granted 258,000 $2.10
Exercised (136,000) $1.42
Canceled (177,166) $3.01
--------
Balance at December 31, 1997 831,334 $2.22
Granted 25,000 $2.38
Exercised (2,500) $2.06
Canceled (59,501) $2.39
--------
Balance at December 31, 1998 794,333 $2.22
GRANTED 200,000 $2.83
EXERCISED (182,000) $2.02
CANCELED (85,666) $2.25
--------
BALANCE AT DECEMBER 31, 1999 726,667 $2.44
=======
Weighted Avg. Remaining
Contractual Life 5.0 yrs
=======
Exercisable at December 31,
1999 726,667 $2.44
=======
Using the Black-Scholes option valuation model, the estimated fair values of
options granted during 1999, 1998, and 1997 were $1.66, $1.77, and $1.60 per
share, respectively. Principal weighted-average assumptions used in applying the
Black-Scholes model were as follows:
1999 1998 1997
---- ---- ----
Risk-free interest rate 5.8% 4.7% 6.5%
Expected volatility 62.1% 62.2% 64.9%
Expected terms 5YRS 10 yrs 10 yrs
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All employees with at least one year's experience with the Company may
participate in the Company's 401(k) plan. Company matching expense for the plan
was $190,000, $179,000, and $181,000 in 1999, 1998, and 1997, respectively.
(7) PROPERTY AND EQUIPMENT
Property and equipment, substantially all of which is pledged as security
under the bank credit facility (see Note 2), other indebtedness or capital
leases, at December 31, 1999 and 1998, is as follows (in thousands of dollars):
1999 1998
---- ----
Land $ 1,532 $ 1,532
Buildings and leasehold improvements 7,318 7,358
Revenue equipment 8,584 9,188
Revenue equipment under
capital leases 21,941 23,850
Other property 7,195 7,715
-------- ---------
46,570 49,643
Less accumulated depreciation (22,490) (20,810)
-------- ---------
$ 24,080 $ 28,833
========= =========
(8) PREPAID AND ACCRUED EXPENSES
An analysis of prepaid and accrued expenses at December 31, 1999 and 1998,
is as follows (in thousands of dollars):
1999 1998
---- ----
PREPAID EXPENSES:
Insurance $ 992 $ 473
Shop and truck supplies 2,731 2,287
License plates and permits 1,238 680
Other 1,332 1,962
------- ------
$ 6,293 $5,402
======= ======
ACCRUED EXPENSES:
Salaries and wages $ 3,947 $ 2,979
Fuel and mileage taxes 1,117 759
Equipment leases 467 715
State Taxes 315 255
Use & fuel tax 910 1,034
Other 856 1,676
------- -------
$ 7,612 $ 7,418
======= =======
(9) TRANSACTIONS WITH AFFILIATED PARTIES
In 1999, 1998, and 1997, the Company leased approximately 224, 206, and 144
tractors, respectively, from unaffiliated leasing companies which had purchased
the trucks from a dealership affiliated with the Company's Chief Executive
Officer who is also a director of the Company. The lessors paid a selling
commission to the dealership. The terms of the leases were the result of
negotiations between the Company and the lessors. The Company believes the
involvement of the selling dealership did not result in lease terms that are
more or less favorable to the Company than would otherwise be available to it.
The Company intends to lease approximately 270 tractors in 2000 under a similar
arrangement as described above. The Company also purchases maintenance parts and
services from the dealership from time to time. Total payments to the dealership
for these services were $735,000, $502,000 and $466,000 in 1999, 1998 and 1997,
respectively.
(10) SUBSEQUENT EVENTS
On January 14, 2000, a group consisting of management of the Company and
members of the Board of Directors, infused $2.3 million capital in the form of
subordinate loans. The infusion of at least $2.0 million of cash was a condition
precedent to the new bank agreement. On March 13, 2000, the Company repaid the
loans in full with the proceeds of a private offering of 1,150,000 shares of the
Company's common stock. The same persons who made the subordinated loans to the
Company purchased the stock at $2.00 per share.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Shareholders and Board of Directors
of Intrenet, Inc.:
We have audited the accompanying consolidated balance sheets of INTRENET,
INC. (an Indiana corporation) and subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Intrenet,
Inc. and subsidiaries as of December 31, 1999, and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
ARTHUR ANDERSEN LLP
Indianapolis, Indiana,
April 13, 2000
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