1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(AS FILED VIA EDGAR ON AUGUST 20, 1999)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 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 number 0-14060
---------
INTRENET, INC.
--------------
(Exact name of registrant as specified in its charter)
INDIANA 35-1597565
- ------------------------------- --------------------------------
(State or other jurisdiction of (IRS 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
-------------------
Not Applicable
---------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report
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
------ ------
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, without par value, 13,684,066 shares issued and
outstanding at August 2, 1999.
2
INTRENET, INC.
FORM 10-Q
JUNE 30, 1999
INDEX
PAGE
----
Part I - Financial Information:
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
June 30, 1999 and December 31, 1998 ............................. 3
Condensed Consolidated Statements of Operations
Three Months and Six Months Ended ............................... 4
June 30, 1999 and 1998
Condensed Consolidated Statement of Shareholders' Equity
Six Months Ended June 30, 1999 .................................. 5
Condensed Consolidated Statements of Cash Flows
Three Months and Six Months Ended ............................... 6
June 30, 1999 and 1998
Notes to Condensed Consolidated Financial Statements .............. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................ 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk ......... 12
Part II - Other Information:
Item 1. Legal Proceedings ................................................. 13
Item 2. Changes in Securities ............................................. 13
Item 3. Defaults Upon Senior Securities ................................... 13
Item 4. Submission of Matters to a Vote of Security Holders ............... 14
Item 5. Other Information ................................................. 14
Item 6. Exhibits and Reports on Form 8-K .................................. 14
2
3
INTRENET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
(In Thousands of Dollars)
Assets 1999 1998
------ ---- ----
(UNAUDITED)
Current assets:
Cash and cash equivalents $ 340 $ 271
Receivables, principally freight revenue less
allowance for doubtful accounts of $1,781 in 1999
and $1,538 in 1998 38,661 33,233
Prepaid expenses and other 6,102 5,402
------- -------
Total current assets 45,103 38,906
Property and equipment, at cost, less accumulated
depreciation 26,422 28,833
Reorganization value in excess of amounts allocated
to identifiable assets, net of accumulated amortization 4,755 4,967
Deferred income taxes, net 2,886 2,886
Other assets 515 2,208
------- -------
Total assets $79,681 $77,800
======= =======
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Current debt and capital lease obligations $ 4,024 $ 5,789
Accounts payable and cash overdrafts 9,179 9,439
Current accrued claim liabilities 7,541 7,878
Other accrued expenses 8,267 7,418
------- -------
Total current liabilities 29,011 30,524
------- -------
Long-term debt and capital lease obligations 25,924 20,105
Long-term accrued claim liabilities 2,800 2,800
------- -------
Total liabilities 57,735 53,429
------- -------
Shareholders' equity:
Common stock, without par value; 20,000,000
shares authorized; 13,674,066 and 13,662,066 shares
issued and outstanding, respectively 16,881 16,856
Retained earnings since January 1, 1991 5,065 7,515
------- -------
Total shareholders' equity 21,946 24,371
------- -------
Total liabilities and shareholders' equity $79,681 $77,800
======= =======
The accompanying notes are an integral part of
these consolidated financial statements.
3
4
INTRENET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
(In Thousands of Dollars, Except Per Share Data)
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
Operating revenues $ 72,171 $ 66,351 $ 138,486 $ 127,027
Operating expenses:
Purchased transportation
and equipment rents 33,763 29,861 64,096 57,098
Salaries, wages, and benefits 18,215 15,767 35,105 30,231
Fuel and other operating expenses 12,982 11,961 24,712 23,160
Operating taxes and licenses 2,595 2,554 5,119 5,068
Insurance and claims 2,252 1,974 4,008 3,945
Depreciation 986 977 1,968 1,964
Other operating expenses 1,174 903 2,178 1,923
------------ ------------ ------------ ------------
71,967 63,997 137,186 123,389
------------ ------------ ------------ ------------
Operating income 204 2,354 1,300 3,638
Interest expense (622) (643) (1,241) (1,303)
Contigent liability special charge (2,207) -- (2,207) --
Other expense, net (105) (105) (210) (210)
------------ ------------ ------------ ------------
Earnings before income taxes (2,730) 1,606 (2,358) 2,125
Provision for income taxes 48 (360) (92) (491)
------------ ------------ ------------ ------------
Net earnings $ (2,682) $ 1,246 $ (2,450) $ 1,634
============ ============ ============ ============
Earnings per common and common
equivalent share
Basic $ (0.20) $ 0.09 $ (0.18) $ 0.12
============ ============ ============ ============
Diluted $ (0.19) $ 0.09 $ (0.18) $ 0.12
============ ============ ============ ============
Weighted average shares outstanding during period 13,674,066 13,550,638 13,671,668 13,549,934
============ ============ ============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
4
5
INTRENET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(Unaudited)
(In Thousands of Dollars)
Common Stock
---------------------------- Retained Shareholders'
Shares Dollars Earnings Equity
----------- ---------- ---------- -------------
Balance, December 31, 1998 13,662,066 $ 16,856 $ 7,515 $ 24,371
Exercise of stock options 12,000 25 -- 25
Net earnings for 1999 -- -- (2,450) (2,450)
---------- ---------- ---------- ----------
Balance, June 30, 1999 13,674,066 $ 16,881 $ 5,065 $ 21,946
========== ========== ========== ==========
The accompanying notes are an integral part of
these consolidated financial statements.
5
6
INTRENET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
(In Thousands of Dollars)
Three Months Six Months
Ended June 30, Ended June 30,
--------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
Cash flows from operating activities:
Net earnings $(2,682) $ 1,246 $(2,450) $ 1,634
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Deferred income taxes (61) 360 0 491
Depreciation and amortization 1,098 1,097 2,192 2,204
Provision for doubtful accounts 122 74 228 133
Contigent liability charge 2,118 -- 2,118 --
Changes in assets and liabilities, net:
Receivables (2,414) (3,586) (5,656) (3,592)
Prepaid expenses 1,001 397 (700) (1,743)
Accounts payable and accrued expenses (11) (155) (172) 880
------- ------- ------- -------
Net cash provided by (used in)
operating activities (829) (567) (4,440) 7
------- ------- ------- -------
Cash flows from financing activities:
Net borrowings on line of
credit, net 1,662 2,210 5,913 2,829
Principal payments on long-term debt (979) (854) (1,858) (1,826)
Proceeds from exercise of stock options 0 0 25 5
------- ------- ------- -------
Net cash provided by
financing activities 683 1,356 4,080 1,008
------- ------- ------- -------
Cash flows from investing activities:
Additions to property and equipment (108) (557) (1,056) (646)
Disposals of property and equipment 109 19 1,485 97
------- ------- ------- -------
Net cash provided by (used in)
investing activities 1 (538) 429 (549)
------- ------- ------- -------
Net increase (decrease) in cash
and cash equivalents (145) 251 69 466
Cash and cash equivalents:
Beginning of period 485 813 271 598
------- ------- ------- -------
End of period $ 340 $ 1,064 $ 340 $ 1,064
======= ======= ======= =======
The accompanying notes are an integral part of
these consolidated financial statements.
6
7
INTRENET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(Unaudited)
(1) UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements include
the accounts of Intrenet, Inc. and all of its subsidiaries (collectively, the
Company). Operating subsidiaries at June 30, 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 intermodal 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 truckload carrier, brokerage and logistics management services
throughout North America.
The consolidated financial statements included herein have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). In management's opinion, these financial statements include
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of the results of operations for the interim periods
presented. 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. For this reason, the accompanying
consolidated financial statements and notes thereto should be read in
conjunction with the financial statements and notes for the year ended December
31, 1998, included in the Company's 1998 Annual Report on Form 10-K.
Earnings per common and common equivalent share have been computed on
the basis of the weighted average common shares outstanding during the periods.
The results for the three month and six month periods ended June 30,
1999, are not necessarily indicative of the results to be expected for the
entire year.
(2) INCOME TAXES
Due to the year-to-date loss in 1999, the Company did not record
Federal tax expense for the year. The Federal tax expense recorded in the first
quarter was credited to income in the second quarter. The tax assets created in
1999 have been fully reserved.
(3) CONTINGENT LIABILITIES
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 is based on the withdrawal of R-W Service
System, Inc. ("RW") from the Fund in 1992. The Company's records indicate that
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 currently claims that RW's withdrawal liability is
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 as
provided by the MPPAA, the Fund rejected that request and the claim is now the
subject of binding arbitration. The Company is obligated to make interim
payments to the Fund until the issue of liability is resolved. The interim
payment obligation is currently approximately $88,500 per month. Through June
30, 1999, the Company had made payments to the Fund that total approximately
$2.1 million. Through the first quarter of 1999, the parties had widely
divergent settlement positions. The claim was the subject of a binding
arbitration proceeding and it was not possible to estimate a potential loss with
respect to the claim. Therefore, the Company had not recorded a loss contingency
for the claim. In August, the parties engaged in meaningful settlement
negotiations. As part of the negotiations, the Company offered to pay the Fund
$2.2 million in full satisfaction of the
7
8
claim. Accordingly, the Company established a special charge of $2.2 million
with respect to this claim in the second quarter of 1999. At this point, neither
the Fund nor the Company have agreed to any settlement. There can be no
assurance that the ultimate resolution of this matter will not have a material
adverse effect on the Company's liquidity, results of operations or financial
condition.
The Company's subsidiary, RDS, is 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. In its appeal, RDS asserted it was never properly served in the
action and that there was insufficient basis to support an award of punitive
damages. RDS has notified its workers' compensation carrier of the award. 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.
(4) TRANSACTIONS WITH AFFILIATED PARTIES
To date, in 1999, the Company has leased approximately 125 tractors
from an unaffiliated leasing company which had purchased the trucks from a
dealership affiliated with a member of the Company's Board of Directors and a
current officer of the Company. The lessor paid a selling commission to the
dealership. The terms of the lease were the result of negotiations between the
Company and the lessor. The Company believes the involvement of the selling
dealership did not result in lease terms that are more of less favorable to the
Company than would otherwise be available to it. During the last three years,
the Company has leased an average of 225 tractors a year that were purchased
from the dealership. The Company also purchases maintenance parts and services
from the dealership from time to time. Total payments to the dealership for
these services have average approximately $500,000 per year for the last three
years.
8
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the
condensed consolidated financial statements and notes thereto appearing
elsewhere in this report. Certain statements made in this report relating to
trends in the Company's business, as well as other statements including such
words as "believe", "expect", "anticipate", and other similar expressions
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. For a description of risks and
uncertainties relating to forward looking statements, see the discussion in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
The Company reported a net loss of $2,682,000 on revenues of $72.2
million in the three months and a net loss of $2,450,000 on revenues of $138.5
million in the six months ended June 30, 1999. This compares with net earnings
of $1,246,000 on revenues of $66.4 million, and net earnings of $1,634,000 on
revenues of $127.0 million in the comparable periods of 1998, respectively. The
Company's revenue grew by 8.7 percent in the second quarter of 1999 and all of
its subsidiaries reported revenue improvements during the quarter and for the
full year. Fuel prices have been rising all year, reflecting a price per gallon
for the second quarter that was approximately $.03 higher than the prior year's
quarter, however the average price for the six months period was approximately
$.03 per gallon lower than the prior year. Revenue miles increased for the
quarter and year to date; however, increased fuel cost, driver turnover, higher
driver wages and inefficient equipment utilization have adversely affected
profitability. The Company has implemented programs to improve equipment
utilization and believes that higher wages will reduce driver turnover. The
Company also experienced one time expenses totaling $2.8 million in connection
with a pending legal proceeding and severance arrangements with former Company
management. Barring any unforeseen changes in the overall economy, the Company
expects it will benefit from continuing cost reduction programs in the areas of
a better fuel purchase network, safety, purchasing and insurance costs.
Revenue miles for the second quarter of 1999 increased to 44.6 million
miles from 42.6 million miles as a result a greater average number of tractors
in the fleet. Revenue per revenue mile in the second quarter of 1999 improved by
2.2 percent to $1.40 per mile, up from $1.37 last year, continuing the trend
reported in the first quarter.
On July 19, 1999, RRT entered into an agency agreement in the Dallas,
Texas, area which added approximately 100 company drivers and 50 owner operators
which should positively affect its revenue for the balance of the year.
The Company's total operating fleet, including owner-operators, at the
end of the second quarter of 1999 was 2,402 tractors, up from 2,250 at the end
of the second quarter of 1998, an increase of 7 percent. The number of Company
owned tractors, at the end of the second quarter in 1999, grew by 6 percent, as
compared with 1998.
A discussion of the impact of the above and other factors on the
results of operations in the three months and six months ended June 30, 1999, as
compared to the comparable periods of 1998 follows.
1999 COMPARED TO 1998
- ------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30 Six Months Ended June 30
---------------------------------- % -------------------------------- %
KEY OPERATING STATISTICS 1999 1998 Change 1999 1998 Change
- ------------------------ ----- ----- ------ ------ ----- ------
Operating Revenues ($ millions) $72.2 $66.4 8.7% $138.5 $127.0 9.1%
Average Number of Tractors 2,349 2,249 4.4% 2,330 2,225 4.7%
Total Loads (000's) 96.5 91.1 5.9% 188.5 174.9 7.8%
Revenue Miles (millions) 44.6 42.6 4.7% 85.8 82.6 3.9%
Average Revenue per
Revenue Mile * $1.40 $1.37 2.2% $1.39 $1.36 2.2%
- ------------------------------------------------------------------------------------------------------------------------------
* Excluding brokerage revenue
9
10
OPERATING REVENUES
Operating revenues for the three months and six months ended June 30,
1999, totaled $72.2 million and $138.5 million, respectively, as compared to
$66.4 million and $127.0 million for the same periods in 1998, reflecting better
freight availability than the prior year. All of the Company's five subsidiaries
continued to grow in 1999. Revenue increased by $5.8 million, or 8.7 percent, in
the three months, and $11.5 million, or 9.1 percent, in the six months ended
June 30, 1999, over the comparable 1998 periods. The average number of Company
owned tractors increased 10.0 percent from 1,205 to 1,326 in the six month
period ended June 30, 1999, from the comparable period in 1998, while the
average owner-operator tractor count decreased 1.6 percent from 1,020 to 1,004.
Approximately 49.8 percent of the Company's revenue was generated by
Company-operated equipment, and 36.1 percent by owner-operator equipment in the
six months ended June 30, 1999. This compares to 50.8 percent and 37.3 percent,
respectively, in the 1998 period. The remaining revenues were from freight
brokered to other carriers ("brokered freight").
The Company experienced a 2.2 percent improvement in the average
revenue per revenue mile in the first six months of 1999, as compared to 1998.
This is generally the result of a slight tightening of capacity in the markets
served by the Company.
OPERATING EXPENSES
The following table sets forth the percentage relationship of operating
expenses to operating revenues for the three months and six months ended June
30.
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
1999 1998 1999 1998
----- ----- ---- ----
Operating revenues 100 % 100 % 100 % 100 %
Operating expenses:
Purchased transportation
and equipment rents 46.8 45.0 46.3 44.9
Salaries, wages and benefits 25.2 23.8 25.4 23.8
Fuel and other operating expenses 18.0 18.0 17.8 18.2
Operating taxes and licenses 3.6 3.8 3.7 4.0
Insurance and claims 3.1 3.0 2.9 3.2
Depreciation 1.4 1.5 1.4 1.5
Other operating expenses 1.6 1.4 1.6 1.5
--- --- --- ---
Total operating expenses 99.7% 96.5% 99.1% 97.1%
==== ==== ==== ====
Purchased transportation and equipment rents increased as a percentage
of revenue due to the increased amount of brokered freight. Salaries, wages and
benefits increased as a percentage of revenue because of the increases in driver
pay at all of the trucking subsidiaries plus one time charges relating to
severance agreements with two former executives that totaled approximately
$550,000. The driver pay increases were in response to competitive marketplace
for driver services. Fuel and other operating expenses are attributable to
Company-operated equipment and these expenses remain relatively unchanged. Other
operating expenses increased slightly due to increases in communications and bad
debt provisions. All other operating expenses have remained relatively
unchanged.
In summary, driver turnover, higher driver wages, management changes
and inefficient equipment utilization have adversely affected the Company's
operating expenses for the first six months of 1999.
10
11
INTEREST EXPENSE
Bank borrowings were higher in 1999 than 1998 while capitalized lease
debt was lower. The less expensive bank debt and the reduction in the borrowing
rate due to the amended bank agreement in 1999 caused interest expense to remain
approximately the same in 1999 as it was in 1998.
CONTINGENT LIABILITY SPECIAL CHARGE
During the second quarter of 1999, the Company charged the income
statement $2.2 million representing the amount of the Company's offer to settle
a pending claim asserted by the Central States Southeast and Southwest Areas
Pension Fund (the "Fund"). As of June 30, 1999, the Company had made interim
payments to the Fund that total approximately $2.1 million. For further
information, see Part II - Item 1 of this report.
PROVISION FOR INCOME TAXES
Due to the year-to-date loss in 1999, the Company did not record
Federal tax expense for the year. The Federal tax expense recorded in the first
quarter was credited to income in the second quarter. The tax assets created in
1999 have been fully reserved.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $69,000 of cash in the first six months of 1999,
compared to $466,000 in 1998. As reflected in the accompanying Consolidated
Statements of Cash Flows, $4.5 million of cash was used in operating activities,
primarily by increased accounts receivable and cash used to purchase plates and
permits for the Company's fleet, offset by depreciation. The cash flow from
operations were not effected because income before depreciation and other
noncash charges was offset by increased working capital requirements of
approximately $6.5 million. The largest working capital need was incurred in
accounts receivable of $5.6 million. Net cash of $4.1 million was generated by
financing activities, primarily bank borrowings. Net cash of $428,000 was
provided in financing activities, primarily from the net disposal of property
and equipment.
The Company's day-to-day financing is provided by borrowings under its
bank credit facility. The credit facility, as amended on May 7, 1999, consists
of a $2 million term loan and a $5 million capital expenditure loan, both with a
maturity date of December 31, 2000 and a $28 million revolving line of credit,
which expires January 1, 2001. Quarterly principal payments of $100,000 on the
term loan are required. There is currently nothing outstanding under the capital
expenditure loan. The line of credit includes provisions for the issuance of
standby letters of credit which, as issued, reduce available borrowings under
the line of credit. Borrowings under the line of credit are limited to amounts
determined by a formula tied to the Company's eligible accounts receivable and
inventories, as defined in the credit facility. Borrowings under the revolving
line of credit totaled $14.8 million at June 30, 1999, and outstanding letters
of credit totaled $6.9 million at that date. The combination of these two bank
credits totaled $21.7 million, leaving $5.5 million of borrowing capacity
available at June 30, 1999.
The Company's May 7, 1999, amended bank agreement, resulted in changes
to maturity dates, term loan principal, applicable interest rates and financial
covenants. The maturity of the revolving line of credit was extended to January
1, 2001, from January 1, 2000. The term loan changes resulted in a principal
capacity reduction from $5.0 million to $2.0 million and an extension on the
maturity date from December 31, 1999, to December 31, 2000. The term loan
principal capacity reduced the entire credit facility to $35.0 million, from
$38.0 million. The new term loan agreement requires quarterly payments of
$100,000 starting July 1, 1999, with the final installment due on December 31,
2000. The maturity date for a capital expenditures loan was also extended to
December 31, 2000, from December 31, 1999. The interest rate margin on all
credit lines was reduced to 175 basis points over LIBOR, from 250 basis points
over LIBOR. In addition, changes were made to a number of the financial
covenants in the agreement.
As a result of the second quarter loss in 1999, the Company would not
have been in compliance with all of the financial covenants contained in the May
7, 1999, amended bank agreement. The Company's bank agreement was amended again
in August, 1999. The amended agreement, which became effective June 30, 1999,
amended the financial covenants for June 1999, and future periods in a manner to
accommodate the expenses related
11
12
to the contingent liability special charge and the severance arrangements with
former management. This amendment also limited the availability to the Company's
capital expenditure loan of $5,000,000 until the Company has meet a specified
fixed charge ratio coverage for three consecutive months.
The Company was in compliance with all its debt covenants, as amended,
for the period ending June 30, 1999.
The Company believes that cash generated from operations, and cash
available to it under the bank credit facility will be sufficient to meet the
Company's needs for the foreseeable future.
YEAR 2000
The Company has assessed, and continues to assess, the impact of the
Year 2000 Issue on its reporting systems and operations. The Year 2000 Issue
exists because many computer systems and applications currently use two-digit
date fields to designate a year. As the century date occurs, date sensitive
systems will recognize the year 2000 as 1900 or not at all. This inability to
recognize or properly treat the year 2000 may cause our systems to process
critical financial and operational information incorrectly or may cause the
system to discontinue functioning altogether. One of the more significant Year
2000 issues faced by the Company is from its fully integrated dispatch and
equipment control systems, which were not Year 2000 compliant. The Company
updated and worked with the vendors of any products it is using to install new
models and/or modify all of its applications and computer systems and, in
particular, its dispatch and equipment control system to insure that they will
be Year 2000 compliant. All programs have been tested and problems have been
resolved by June 30, 1999. The Company does not expect the costs associated with
becoming Year 2000 compliant to be material. The Company has incurred cost of
approximately $50,000 to date, and expects any future costs to be minimal. These
costs are being charged to operations as incurred. Management has not developed
any contingency plan regarding its dispatch and equipment control systems at
this time, but will develop one, if deemed necessary.
As part of the Company's comprehensive review, it is continuing to
verify the Year 2000 readiness of third parties (vendors and customers) with
whom the Company has material relationships. At present, the Company is not able
to determine the effect on the Company's results of operations, liquidity, and
financial condition in the event the Company's material vendors and customers
are not Year 2000 compliant. The Company will continue to monitor the progress
of its material vendors and customers and formulate a contingency plan when the
Company believes a material vendor or customer will not be compliant.
The estimated percentage of completion as of June 30, 1999, the date on
which the Company believes it had completed with its Year 2000 compliance
efforts, and the expenses related to the Company's Year 2000 compliance efforts
are based on management's best estimates. Actual results could materially differ
from those anticipated. Specific factors that might cause such material
differences include, but are not limited to, the availability of personnel
trained in this area and the ability to locate and correct all relevant computer
codes. In addition, there can be no assurances that the systems or products of
third parties on which the Company relies will be timely converted or that a
failure by a third party, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company.
ITEM 3. 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 June 30,
1999, for those variable rate debt instruments, a market change of 100
basis-points in interest rates would correspond to an approximately $150,000
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. 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.
12
13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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 is based on the withdrawal of R-W Service
System, Inc. ("RW") from the Fund in 1992. The Company's records indicate that
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 currently claims that RW's withdrawal liability is
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 as
provided by the MPPAA, the Fund rejected that request and the claim is now the
subject of binding arbitration. The Company is obligated to make interim
payments to the Fund until the issue of liability is resolved. The interim
payment obligation is currently approximately $88,500 per month. Through June
30, 1999, the Company had made payments to the Fund that total approximately
$2.1 million. Through the first quarter of 1999, the parties had widely
divergent settlement positions. The claim was the subject of a binding
arbitration proceeding and it was not possible to estimate a potential loss with
respect to the claim. Therefore, the Company had not recorded a loss contingency
for this claim. In August, the parties engaged in meaningful settlement
negotiations. As part of the negotiations, the Company offered to pay the Fund
$2.2 million in full satisfaction of the claim. Accordingly, the Company
established a special charge of $2.2 million with respect to this claim in the
second quarter of 1999. At this point, neither the Fund nor the Company have
agreed to any settlement. There can be no assurance that the ultimate resolution
of this matter will not have a material adverse effect on the Company's
liquidity, results of operations or financial condition.
The Company's subsidiary, RDS, is 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. In its appeal, RDS asserted it was never properly served in the
action and that there was insufficient basis to support an award of punitive
damages. RDS has notified its workers' compensation carrier of the award. 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 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
13
14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of the Company was held on May 19,
1999. The following individuals were elected as directors for the ensuing year
or until their successors are duly elected and qualified with the following
votes cast for or against. There were no abstentions or broker non-votes.
For Against
--- -------
Vincent A. Carrino 12,884,383 4,989
John P. Delavan 12,884,409 4,963
Robert B. Fagenson 12,883,243 6,129
Ned N. Fleming III 12,884,411 4,961
Eric C. Jackson 12,884,411 4,961
Edwin H. Morgens 12,884,411 4,961
Thomas J. Noonan, Jr. 12,883,267 6,105
Gerald Anthony Ryan 12,883,243 6,129
Philip Scaturro 12,884,411 4,961
As previously announced, on June 18th, John P. Delavan resigned from
the Company as President, CEO and a board member and was replaced by Eric C.
Jackson as President and CEO.
The shareholders of the Company also ratified the selection of Arthur
Andersen LLP as auditors for 1998 with 12,879,805 votes in favor, 4,918 against,
and 4,649 abstentions. There were no broker non-votes.
The shareholders of the Company also ratified the resolution to restore
voting rights to "control shares" of the Brookhaven Group. A total of 7,531,851
shares were considered "interested shares" and not eligible to vote on this
matter. The vote by eligible shareholders was 3,713,851 votes in favor, 127,443
against and 1,712,751 abstentions.
ITEM 5. OTHER INFORMATION
On August 6, 1999, Roger T. Burbage resigned as Executive
Vice-President and Chief Financial Officer of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 10.1 - Fifth Amendment to the Fourth Amended
and Restated Loan Agreement dated as
of May 7, 1999.
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
14
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTRENET, INC.
-----------------------------
(Registrant)
/S/ ERIC C. JACKSON
-----------------------------
Eric C. Jackson,
President and Chief
Executive Officer
August 20, 1999 /S/ RUSSELL L. DEEG
---------------- -----------------------------
Russell L. Deeg,
Vice-President and Controller
(Principal Financial and
Accounting Officer)
15